The euro has posted slight losses in the Thursday session, as EUR/USD is trading at 1.1170. In economic news, the eurozone surplus dropped sharply, coming in at EUR 19.6 billion. This was well short of the forecast of EUR 22.4 billion. In the US, today’s major release is unemployment claims, which is expected to dip to 241 thousand. On the manufacturing front, the markets are braced for a soft reading from Philly Fed Manufacturing Index, with an estimate of 25.5 points. On Friday, the eurozone releases Final CPI and the US will publish Building Permits and Housing Starts.
US consumer numbers were soft on Thursday, as CPI and retail sales reports missed estimates. CPI declined 0.1%, short of the estimate of 0.2%. This was the second decline in three months, as inflation is currently at 15%, well below the Federal Reserve’s target of 2.0%. Retail Sales, the primary gauge of consumer spending was dismal, coming in at -0.3%, compared to a forecast of +0.1%. This marked the indicator’s weakest reading since August 2016. Weak retail sales is clearly an area of concern – the soft reading could drag down GDP for the second quarter, as as consumer spending accounts for more than two-thirds of economic growth. Although surveys continue to show that US consumers remain optimistic about the economy, this hasn’t translated into stronger consumer spending. The euro initially posted gains following the release of this data, but the dollar was able to recover.
As expected, the Federal Reserve raised rates on Thursday by 25 basis points, to a target range of 1.00 percent to 1.25 percent. The rate statement portrayed an optimistic picture, noting that the economy was growing, and the labor market remained strong. As for inflation, which remains stubbornly low, the statement acknowledged that inflation remained below the Fed’s target of 2.0%, but expected that goal to be reached in the “medium term”. The Fed projected one more rate hike in 2017, and the markets are circling the December meeting as the most likely date. The odds for a September increase are at 18%, compared to 23% a week ago, according to the CME Group. As for a December increase, the odds are currently at 38%. One surprising development was that Fed Chair Janet Yellen outlined a plan to reduce its $4.2 trillion balance sheet (comprised of Treasury bonds and mortgage-backed securities). Yellen was short on specifics, saying that the goal was to begin the normalization “relatively soon”. The balance sheet ballooned after the financial crisis in 2008, as the Fed implemented a massive quantitative easing program as part of its accommodative monetary policy, together with interest rates of zero. The gradual reduction in the purchase of these assets signifies an important vote of confidence in the strength of the US economy.
