U.S. Stocks and Sterling Jump Sharply, FOMC Meeting and BOJ Rate Decision Awaited

U.S. shares shrugged off downbeat U.S. data that showed an unexpected drop in August domestic retail sales to close higher and reach fresh record high on Friday. At the close on Wall Street, the Dow Jones Industrial Average added nearly 0.3 percent to close at 22,268.34 points, the S&P 500 rose 0.18 percent to end at 2,500.23. Both stock benchmark indexes hit their fresh records. Meanwhile, the Nasdaq Composite jumped 0.3 percent to close at 6,448.47.
Investor confidence was boosted by data released on Thursday that reported U.S. inflation hit a seven-month high in August. According to the U.S. Bureau of Labor Statistics, U.S. consumer prices jumped 0.4 percent last month after having edged 0.1 percent higher in July. August’s monthly gain marked the largest in the last seven months and helped lift the year-on-year increase in the CPI to 1.9 percent from 1.7 percent in July.
Excluding the volatile food and energy components, U.S. consumer prices increased 0.2 percent in August following four straight monthly increases of 0.1 percent. Analysts had expected CPI to have risen 0.3 percent and the so-called CPI to have gained 0.2 percent in August.
However, a monthly repot posted by the U.S Commerce Department showed domestic retail sales unexpectedly fell in August due to damages caused by Hurricane Harvey that likely depressed motor vehicle purchases. Data released on Friday indicated that August retail sales
drop 0.2 percent while July’s reading was revised downward to an increase of 0.3 percent instead of the previous figure showing a 0.6 percent jump.
Motor vehicle sales were reported to have tumbled 1.6 percent last month after being unchanged in July. This is the biggest drop since January. Stripping down the influence of sales in automobiles, gasoline, building materials and food services, retail sales decreased by 0.2 percent last month after an unrevised 0.6 percent increase in July.
The Federal Reserve is scheduled to meet on Tuesday and Wednesday. Although the two-day meeting is not expected to result in a rate hike, details that the central bank might give about the unwinding of its $4.5 trillion balance sheet is highly awaited.
Besides the FOMC Statement due on Wednesday, there are other U.S. data to consider. Reports on housing starts and building permits for August are due to be released on Tuesday, followed by data on existing home sales on Wednesday. Housing starts are projected to rise to 1.18 million from 1.16 million in July while building permits are expected to slide slightly to 1.22 million from 1.23 million recorded in the preceding month.
Turning to the British Pound, the currency hit its highest level versus its American counterpart since the Brexit vote last year June on Friday. The demand for Sterling was bolstered by comments from Bank of England committee member Gertjan Vlieghe who on Friday said that the moment for a rate increase “is approaching”.
Mr.Vlieghe has been one of the more dovish MPC members of late; therefore, his comments have been seen as significant.
The Bank of England kept its benchmark interest rate unchanged on Thursday but Governor Mark Carney hawkishly said that the probability of a rate increase has “definitely increased.” Sterling jumped 1.4% to trade at $1.3394 on Friday – the highest level since June 19th 2016. The BoE is next due to meet on 2 November.
Earlier in the week, data released by the Office for National Statistics showed U.K. consumer prices overall increased by 2.9 percent compared with a year earlier. The reading marked an increase from 2.6 percent recorded in July and easily surpassed analysts’ forecast calling for a rise of 2.8 percent.
In the week ahead, the UK will report retail sales growth for August on Wednesday, which is expected to slow down to a rise of 0.2 percent – below the long-term average.
In other central bank news, the Swiss National Bank kept interest rates on hold as well. However, as the SNB said it’s ready to intervene in the currency market if necessary to weaken the Swiss franc, the Swiss Franc weakened against the greenback and closed the week lower after having surged in the precious week.
The dollar also edged higher against the Japanese yen after North Korean threatened to sink Japan in response to the latest round of U.N. sanctions against Pyongyang. The buck added 0.54 percent to trade at 110.83 yen per dollar – the level that hadn’t been seen since late July.
The Bank of Japan statement is scheduled for Thursday. Like central banks in other parts of the world, the BOJ has been embarked in a major stimulus program and is anticipated to hold its rates unchanged when it concludes its two-day meeting on Thursday.
Turning to the Canadian dollar, the Loonie fluctuated versus the U.S. dollar last week. In the week ahead, market participants will be watching reports released on Friday that showed data on inflation and retail sales for fresh clues about a possible BOC’s third rate hike in the next coming months. Canadian CPI which is due on Friday is expected to jump from 1.2% to 1.5% in August on a yearly basis. Meanwhile, retail sales are forecast to grow by 0.2 percent on a monthly basis.
Crude oil futures prices experienced its best weekly gain in July last week amidst mounting expectations that demand for crude oil will rise and therefore will reduce excess supplies. The International Energy Agency reported that it forecast crude oil demand to grow by 100,000 barrels a day to 1.6 million bpd in 2017. Meanwhile, on supply aspect, OPEC said production in August dropped by 79,000 bpd to 32.76 million due to the fact that falling production from Venezuela, Iraq, the UAE and Saudi Arabia offset rising output from Nigeria.

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