After being laid to rest prior to the beginning of summer, global deflationary fears have been resurrected and are driving a sour mood across assets classes with equities as well as bonds trading softer. There are a number of factors driving the re-emergence of these fears, most recent of which are inflation numbers out of China which indicate a decline in producer prices along with a headline inflation figure coming in at lacklustre 1.6%. Combine this with recent comments from two separate Federal Reserve members pointing out that the lack of wage growth in the United States is a strong indication of slack in the labour force, which casts doubt on the existence of inflationary pressure within the American economy, and we have a recipe for a return to the deflationary fears which beset markets earlier in the year. In asian trading, the combined impact of these developments has seen the yen, kiwi and aussie dollars outpace the greenback as asian equities markets put in a mixed performance.
Moving onto a brighter story, better than expected employment numbers have seen levity in the sterling as the British economy posted the highest employment rate since records began in the early 70s. While the pound is higher against the euro, it still is within striking distance of its multi-month lows against its continental equivalent whereas it is trading sharply higher versus the greenback. The euro itself is also gaining on the greenback as the US dollar struggles to gain footing in the aftermath of a poor earnings report from JPMorgan which market participants have taken as a bellweather that all is not well stateside.
Prior to the opening bell in New York, equity futures on the S&P 500 and DJIA suggest a weak start to today’s session as the malaise that has beset trading in Asia and Europe is set to infect North America as well. A potential catalyst for a shift in sentiment lays in retail sales and beige book data in the United States to be released later this morning, with better than expected numbers sure to alleviate some of the doubt which has been cast on the performance of the US economy. At this juncture, it’s important to underscore just how rapidly market sentiment and expectations for a rate increases on the part Federal Reserve have changed. As of now, market expectations for lift off in Federal Reserve policy as indicated by pricing of swap spreads and futures have been pushed back well into 2016. This shift has been driven by a combination of continued weakness in China and emerging markets as well as renewed attention on an American labour that has posted strong headline numbers but still has yet to see the uptick in wage growth which would serve as a confirmation of a sustained recovery from the effects of the financial crisis. All of these factors have combined to spark a shift in sentiment which has seen broad based weakness in the USD over the course of several trading sessions. The loonie has been an obvious beneficiary of this, however the buck has been weak against all of its crosses which calls into question the potential revenue impacts to organisations that are selling in US dollars.
Further reading:
Tarullo opposes a rate hike htis year
EUR ticking higher, GBP looking to recover, AUD depressed – Live Europe Market Open from 8:00 GMT
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