- Fed rate hike expectations weigh on Treasuries and support the dollar…
- …following hawkish comments from FOMC’s Lockhart and stronger US services data
- Eurozone economy as a whole seems to have been resilient to the Greek crisis
Fed preparing engines for a rate hike
Fed rate hike expectations built on Wednesday, which pushed up Treasury yields and the dollar. FOMC voting member Dennis Lockhart said in an interview with the Wall Street Journal that a Fed rate hike is ‘close’, noting that he is open for a September move. He mentioned that the rebound of Q2 growth and a further improvement in employment supports this view.
Buoyant ISM services index
Meanwhile, July’s ISM nonmanufacturing index surged to 60.3, up from 56 in June. The strength of this survey was broad based, suggesting that domestic demand is gaining traction. The employment index jumped to 59.6 up from 52.7 in July, the highest reading in a decade.
ADP employment softer
In contrast, we saw a softer July ADP reading, which showed private payrolls increased 185K, down from a downwardly revised 229K the previous month. Nevertheless, the balance of labour market indicators, including initial jobless claims, points to ongoing momentum. So we expect the official nonfarm payrolls in Friday’s employment report to show another strong gain (our forecast is 230K).
Eurozone retail sales decline …
The volume of retail sales in the eurozone fell by 0.6% mom in June, which was weaker than the consensus forecast of -0.2%. Still, the monthly changes tend to be rather volatile and despite the decline in June, sales increased by 0.3% qoq during Q2 as a whole. Combined with stable new car registrations this suggests that private consumption continued to expand in Q2, but more moderately than in Q1, when it grew by 0.5% qoq.
… but intentions for major purchases rises
Ongoing growth of private consumption would also be in line with recent changes in consumer confidence. Although confidence declined in the past few months, it stayed above the level recorded at the start of the year and also above its long-term average value. Moreover, the details of the consumer confidence report show that the main reason for the decline in past few months was deteriorating expectations about the economic situation (probably largely due to the Greek crisis). In contrast, consumers’ intention to carry out major purchases remained roughly unchanged and at a historically high level.
Overall eurozone economy resilient to Greek crisis Although a lot of hard data for June still need to be published, it seems the eurozone economy as a whole was largely resilient to the Greek crisis. Both the composite PMI and Economic Sentiment have remained at levels consistent with GDP growing at rates above the trend growth rate. Moreover, exports and industrial production should benefit from the depreciation of the trade-weighted euro since the start of this year and the pick-up of growth in the US and China after the first quarter. Net exports had a negative impact on GDP growth in Q1 but this should have become positive in Q2 and strengthen in the second half of the year.
Fixed investment is expected to have expanded in Q2 as well and pick-up further in the coming quarters. Corporate profitability is rising, while both financial conditions and bank lending standards have eased considerably since the start of the year.