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September Rate Hike Remains on the Table

July 30, 2016

 “Why is it that people who can’t take advice always insist on giving it?”
James Bond (Daniel Craig), Casino Royale 2016

July is officially over which means that slowly but firmly markets should start to “wake up” from their summer nap and soon things will go back to normal. The transition from summer trading conditions to regular trading conditions is always somewhat tricky as we have all gotten used to the slow price action and uneventful days.

Usually the switch happens relatively quickly and before you know it, EURUSD’s daily range is back close to 120 pips from current 60 or 70 pips, depending on the day.

Furthermore, autumn brings us closer to the big events that could potentially shake the markets and sooner or later we should start seeing it in price action as well. The first highly awaited event is the FOMC September meeting.

Federal Open Market Committee Brings Optimism - September Rate Hike Possible

July FOMC statement was rather optimistic in itself but the markets didn’t really agree with it as the US dollar sold off quite aggressively against majority of its counterparts, and especially Euro, right after the release of the statement. While the FED kept the overnight interest rate target in the 0.25 to 0.50 percent range, they noted that multiple indicators are showing further strengthening in the U.S. economy.

 

yellen

With that said, the FOMC basically confirmed that a rate hike in September is still on the table regardless of the fact that the market itself is highly skeptical on the matter. As I’ve wrote several times, the whole “rate hike show” is far too similar to the one we saw before the December hike and it took the FED exactly one year to go from “talk” to “action”. Hence being skeptical ahead of the September meeting is perfectly justified.

 
When we look at the recent U.S data, then indeed things have improved and in some cases, quite significantly. ISM Non-Manufacturing PMI made a huge leap from 52.9 to 56.5 which is the strongest monthly gain since summer 2015. Keeping in mind that the U.S is service based economy then that alone is a good sign that we could see additional improvement in labor market as well.

Furthermore, manufacturing PMI has also made its way back above the 50 level and what’s even more important is the fact that it has managed to stay above the mentioned level for the last four months. In addition, job creation (NFP) bounced back with beautiful fireworks after the disappointment in June while the unemployment claims hover around the 2006 lows. Bringing it all together, it is understandable that the FED is a bit more optimistic but is it enough to continue with the rate hikes is highly questionable.

 
However, while the recent data from the U.S has been better, the figure of the first release of the second quarter GDP was not what many hoped to see. Instead of a 2.6 percent growth figure we got only 1.2 percent which was clearly way below expectations and to make matters slightly worse, the first quarter was revised from 1.1 percent to 0.8 percent.

Europe’s Banking Sector is Just Fine

According to the latest bank stress test results, Europe’s banking industry is in perfect shape. Italy’s Monte dei Paschi, the UK’s Royal Bank of Scotland and Ireland’s Allied Irish Banks were the only “losers” out of 51 banks that went through the stress test scenario.

mps

While the test showed that everything is close to perfect when it comes to European banks, the reality is quite different as the amount of non-performing loans in the EZ is massive.

It seems that it’s only a matter of time before dominos start falling and governments start bailing out failed banks once again to keep the system alive.

Since we don’t know which bank fails first, though we have plenty of good candidates, I do suggest to keep an eye on Italy’s, Spain’s and Portugal’s banking sectors and especially close eye on the Monte dei Paschi.

Capital Properties FX
30.07.2016