US Interest Rate Expectations

Daily Analysis - 05/08/2015


Asian equity markets were cautious in early Wednesday trading as the Fed moves closer to a September rate hike, which saw the US Dollar and the Bond yields rise late in the US trading session yesterday.

Fed Rate Hike Speculation Engulfs the Markets

The Fed's Dennis Lockhart, in an interview with the Wall Street Journal, noted that there was no reason why the Fed shouldn't hike rates and that only a significant deterioration in the markets could warrant him to turn dovish. The US Dollar and the Bond yields rallied on his comments. USDJPY (124.3) gained 0.28% for the day, lifting off from the day's open at 124.016 to close at 124.366. USDJPY, which was seen consolidating near the support/resistance level of 124 looks to have cleared this zone and could potentially look for further gains in the next few days supported by economic data. The bullish view of the Atlanta Fed was taken seriously by the markets considering that Lockhart was neither on the dovish or the hawkish camp. Lockhart’s comments come just after Friday’s comments from James Bullard, head of the St. Louis Federal Reserve who was of a similar view that the US economy could now sustain a hike in short term interest rates. The US Dollar Index gained 0.49% on yesterday’s close at 97.95.


Apple Rolls Down Stock Slope

Apple (114.62) shares continued their worst performance since the latest fiscal third quarter earnings release which, despite beating estimates the weak forward guidance saw the stock price take a toll. For the day, Apple shares lost more than -3% and posts a third daily session of losses. The stock had previously shed over -6% in the after-hour markets after the earnings were released on 21st July. Apple closed yesterday at 114.63, posting a 27 week low or close to a 6-month low. The drop in Apple comes as the US equity markets lost ground after the comments from the Fed officials. The Dow Jones Index was down -0.23%, while the S&P500 lost -0.21%.


Brent Bounces at the $50 Level

Brent Futures (50.36) for September delivery gained 1.25% yesterday closing at 50.18, after testing the lows of 49.34, last seen in January this year. WTI Crude Oil (46.08) futures for September delivery also closed modestly higher, gaining 1.44% for the day. However, the main risk comes from this evening's Crude Oil inventories report where expectations are for the US Crude oil stock piles to have reduced by a further -1.3 million. Crude oil initially saw a bounce in prices last week after the US EIA report showed more than expected fall in US Crude oil inventories by -4.2 million. If today’s inventories report continues to show more declines in Crude oil inventory, prices in WTI and Brent could see a short term bounce, despite remaining under pressure.


Markets to be Tested Upcoming Session

On the economic calendar today, the markets will get a glimpse into the ADP jobs numbers for July. Expectations heading into the release are for the job growth of 216k for the month, down from 237k estimated private payrolls created last month. Although the ADP numbers aren’t taken seriously in terms of reflecting the NFP numbers, the markets could see a significant reaction regardless as investors position themselves ahead of the Friday’s jobs report. Besides the ADP numbers, US trade balance and ISM non-manufacturing PMI is also due for release, which could offer insights into the underlying sub-components for the NFP report. The final services PMI data is also slated for release later in the US trading session today. The EURUSD (1.086) has grown considerably weaker since the past two days but the pair is currently testing a medium term support at 1.0861 through 1.0823. How price action will unfold here could hold some critical clues as a break below the support will see EURUSD eventually break down to test the lows near 1.056, last seen in April this year.


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