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PA ANALYSIS: Weak inflation casts uncertainty over U.S. rate rises

Jul 16, 2017, 00:40
PA ANALYSIS: Weak inflation casts uncertainty over U.S. rate rises

The dollar weakened and government bond yields fell to multi-week lows on Friday after a benign reading of USA inflation in June and soft retail demand raised doubts the Federal Reserve would increase interest rates later this year.

The unchanged consumer price reading for June followed a 0.1 percent dip in May.

Following the surprise rise in June producer prices yesterday, today's consumer prices, on the other hand, came out softer than expected over the same period.

Turning back to the economic data, consumer price inflation fell to a 1.6 percent annual rate from 1.9 percent prior. US retail sales unexpectedly fell in June for a second straight month, which could temper expectations of strong acceleration in economic growth in the second quarter.

The U.S. currency┬┤s recent advance, notably against the yen, has stalled towards the end of this week as Federal Reserve Chair Janet Yellen curbed some of the monetary tightening expectations that had supported the greenback.

New Zealand's two-year swap rate rose 1 basis point to 2.26 while the 10-year swaps rose 3 basis points to 3.35 percent. The Australian dollar rose 1.22 percent to $0.7823, well on track to post its best weekly performance in four months. Interest rate markets are now tipping the first rate hike to come in June 2018 versus the central bank's forecast of September 2019.

After keeping its key policy rate at a record low near zero for seven years, the central bank began raising rates gradually with one quarter-point hike in December 2015, another one last December and two more in March and June of this year.

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The dollar index fell 0.4 per cent against a basket of currencies, while the euro gained 0.39 per cent to $1.144. Inflation has climbed just 1.6 percent from a year ago.

The New Zealand dollar another high-earning currency that has gained from significant risk appetite this week, shed 0.02 percent to 0.7318 after reaching an eight-month peak of 0.7369 on Thursday.

The Dow Jones Industrial Average .DJI rose 84.65 points, or 0.39 percent, to 21,637.74. It earlier fell to 2.279 percent, its lowest since June 30.

"It is broadly a USA dollar-negative market as latest comments from Yellen and others suggest that interest rates will rise very gently and that is supportive for high-yielding currencies for now", said Viraj Patel, an FX strategist at ING Bank in London. The 10 yr yield is down by 5 bps and the 2s/10s spread is narrowing by 2 bps.

Oil rose 1 percent on Friday, boosted by lower US stockpiles, a slight slowdown in USA crude production and signs of increased Chinese demand, but trading was volatile as global supply remained strong.

Ten of the 11 major S&P sectors rose, with information technology .SPLRCT up 0.89 percent to lead the advancers.

Elsewhere, in the commodities market, gold futures traded at $1,228.05 a troy ounce, compared to $1,221.71 ahead of the data, while crude oil traded at $46.58, compared to $46.62 prior to the release.

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