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The much anticipated minutes from the FOMC meeting in July came and went yesterday, with equity investors not overjoyed as to the tone of the discussions that took place during the last monetary policy consultation.

There was little in the statement to imply the Fed has changed their outlook and are retreating from their stance on tapering, as “almost all participants confirmed that they were comfortable with the characterization of the contingent outlook for asset purchases” and if economic conditions improved as expected, the Committee would “moderate the pace of its securities purchases later this year.”

  • FOMC sticks to their guns; comfortable with the contingent outlook for asset purchases
  • Dovish undertones to the minutes characterize a fractured Fed on near-term growth
  • Global PMI readings telegraph stabilization for the Chinese and European economies; boosts sentiment during overnight trade
  • Weaker than expected Retail Sales in Canada fails to cauterize Loonie bleeding after FOMC minutes
  • CDN CPI on the docket for  tomorrow

The Fed was a tad more pessimistic about the near term economy, with economic activity in the first half of the year coming in slightly softer than previously anticipated.   That being said, the general consensus was that growth would pick up in the second-half and continue to strengthen thereafter.

The dovish undertones to the minutes were that there was extensive discussion surrounding forward guidance, and several members willing to contemplate lowering the unemployment threshold should the Committee deem additional accommodation was necessary.

There was a little more debate in regards to the potential damage from the back-up of long-term interest rates, along with more dialogue surrounding the developments of inflationary pressures; however, the views of the FOMC participants were too fractured to accurately declare that either one of the potential harmful factors has the Fed questioning their current positioning.

When all was said and done, investors decided to brush off the Committee’s indecisiveness surrounding the near-term economic outlook, and  interpreted the minutes as the Fed sticking to its guns, which caused the S&P to finish off by 0.58% as the yield on the 10-year US treasury backed up to 2.9%.   High-beta currencies also felt the sting of a “steady-as-she-goes” Fed, with EURUSD offered below 1.3400, AUDUSD smashing through the 0.9000 handle, and USDCAD accelerating gains to eye the 1.0500 mark.

The overnight session was largely characterized by a deluge of PMI prints from China and Europe, which helped boost risk appetite as the survey’s showed purchasing activity across the globe had recently picked up.   The HSBC Flash Manufacturing PMI hit a four-month high at 50.1, driven by companies restocking activities and the filtering-through of recent fine-tuning measures.   A jump into expansionary territory and a beat of the median analyst estimate at 48.2 helped generate interest for the Aussie on hopes manufacturing growth in China would continue to stabilize, which has the AUDUSD pair trying to regain the 0.9000 level.

Over in Europe, the Flash PMI readings painted a similar picture, with the common-currency bloc as a whole showing the private sector is the healthiest it has been in the last two years.   Purchasing manager activity for both the service and manufacturing sectors handily beat expectations, hitting 51.0 and 51.3 respectively, increasing hopes that the second quarter rise in GDP was not just a one off.   The two countries holding the purse strings for the zone weren’t as convincing, with the readings out of Germany showing economic activity expanded over August by a good amount, while France’s manufacturing and services sectors both contracted from July, missing expectations and sliding below the all-important 50 level.   The strong readings for the zone as a whole has helped equity prices heading into the North American cross, with the FTSE, Dax, and Stoxx up by 0.77%, 1.02%, and 1.04% respectively.   Despite the exuberance of European equities, the EUR is struggling amidst its hangover from yesterday, but managing to find support against the big dollar in the low 1.33s.

Heading into the North American open, retail sales in Canada for the month of June were released earlier this morning.   After a May release that smashed expectations with a headline reading of 1.9% growth, analysts were forecasting the monthly pace of growth in consumer spending to moderate with a decrease of 0.4%.   The official reading showed that moderation in retail spending was more of a slump in June, with the headline reading printing at -0.6%, and stripping out auto sales worsened the picture with a 0.8% decrease from May.   Consumer exhaustion, strikes in Quebec, and flooding in Alberta were all blamed for the disappointing miss of expectations, which saw retail sales in volume terms decline by 1.2%.   The pain for the Loonie from yesterday continues, with USDCAD going bid on the release and battling with situating itself above the 1.0500 handle.   With not much resistance north of the 1.0500 level, a strong close above this level today could bring a test of the July high at 1.0608 within the next couple of days.   Pull-backs for the pair on Loonie strength will most likely be met with buyer demand at the Cloud top just above 1.0400, and then the 50 day moving average at 1.0383.

US equity futures are putting in strong gains ahead of the opening bell, looking to claw back yesterday’s losses after the FOMC meeting minutes.   Jobless claims in the US for the last week came in slightly higher than expected at 336k, but the rolling 4-week average remains at encouragingly low levels, with nothing to suggest this would derail the Fed’s tapering stance.   The DXY remains bid ahead of the North American open, up to 81.50 while some pressure is released from fixed income markets as the 10-year slips below 2.9%.

Looking ahead to  tomorrow, the reading for inflationary pressures in July for Canada is on the docket, set to be released at  8:30am EST.   Much like with their neighbours to the south, inflation has been stubbornly low in Canada over the past year, which has granted the central bank sufficient leeway to keep accommodative monetary policy in place, while allowing imbalances in the housing sector to improve constructively.   In an absence of upward pressure on consumer prices, it will confirm the diverging monetary policy environments between Canada and the US, which does not bode well for the Loonie.   Expectations are that the headline reading tick up slightly to a y/o/y increase of 1.4%, increasing from the 1.2% that was registered in June, however a much warmer than expected reading will most likely have to hit the wires to induce Loonie buying interest to shift the trend we’ve seen over the last week.

Further reading:  It’s all a Question of Timing