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US Fundamentals Diverge

Key Macroeconomic Indicators Continue to Provide Differing Views on the Outlook

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While most analysts are looking towards the optimism in the housing sector, this confidence is likely misplaced considering the steep decline in other sectors of the economy like manufacturing. Data yesterday showed the divide growing as the Fed telegraphs the substantial possibility of a September liftoff.

Housing Soars While Industry Plummets

Data released yesterday from the United States showed the clear dichotomy of the economy after new home sales reached the highest levels since 2008, driven primarily by the 87% rise in sales in the Northeast. However, a look outside the housing economy shows substantial weakness after yesterday’s manufacturing PMI dropped to the weakest level since 2013. Adding to injury was the slump in durable goods orders with the figures missing expectations across the board. While the core figure managed to rise to 0.50%, the regular figure plunged below the prior number, dropping -1.80% with May’s figure revised lower to -1.50%. The aberration in data due to the bounce in April indicates that a correction downwards remains intact and unlikely to abate. The dollar gained broadly over the session as FOMC voting member Jerome Powell put the probability of a September interest rate hike at 50%.

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Crude Stockpiles Shrink

As crude oil prices remain in a consolidation pattern between major support and resistance, yesterday’s inventory drawdown according to the American Petroleum Institute sent major global oil benchmarks climbing. According to the release, crude stockpiles declined by -3.200 million barrels on expectations of a -2.300 million barrel draw. This marks a third straight drop while the number has fallen for 6 of the last 8 readings. Even with the possibility of an uptick in production once Alaskan production comes back online and moreover the threat of expanded output from Saudi Arabia and Libya, crude oil prices remain elevated despite the inherent downside risks. West Texas Intermediate climbed over 3% off of intraday lows in the hours leading up to the announcement before pulling back modestly from highs overnight. Brent has mirrored the movement and largely tracked the momentum in WTI.

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Bank of Japan Minutes Highlight Challenges

Minutes from the last Bank of Japan meeting show that policymakers are not planning any imminent change to the course of quantitative easing strategies but remain concerned about the outlook for inflation. The 2% target is expected to be hit in the first half of 2016 according to the latest estimates, but policymakers are increasingly wary of the diminishing marginal returns of the monetary easing currently underway. Even though expectations of a rebound are gaining momentum, certain policymakers are unconvinced. In general, the population of Japan is losing confidence in the recovery as Shinzo Abe’s popularity amongst voters is in a tailspin, possibly creating calls for early elections. Nevertheless, stocks continue to push higher with the Nikkei 225 hitting the highest level since 1996 and the USDJPY pair rebounding from recent weakness on the back of a stronger dollar.

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WTI Ascending Triangle Technical Pattern

Inventory draws continue unabated according to the latest figures from API likely to be confirmed later in the session by Department of Energy crude oil inventory numbers. The EIA data is expected to show further losses to stockpiles as storage capacity eases following concerns of a buildup that would exceed total capacity. The data yesterday and optimism about economic expansion drove prices back above $60 per barrel as WTI sets up in an ascending triangle pattern based on the 1-month near-term uptrend line meeting resistance $61.79. The consolidation noted yesterday is likely to lead to a breakout sooner or later as the longer the benchmark spends in the horizontal range the more volatile the expected breakout trade. A move above resistance would be indicative of a potential upside breakout targeting recent highs at $62.67.

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