The CAC index has edged upwards in the Friday session. The index is currently trading at 5181.50 and is up 0.48% on the day. On the release front, French consumer spending impressed with a 1.0% gain, beating the estimate of 0.5%. On the inflation front, French Preliminary CPI edged lower to 0.0%, matching the forecast. In the eurozone, CPI Flash Estimate edged lower to 1.3%, but this was above the estimate of 1.2%.
There was positive news on Friday, as consumer spending beat expectations and climbed 1.0% in June. This was the indicator’s strongest gain since January 2015. A recent INSEE survey pointed to renewed consumer confidence, and it the renewed optimism has translated into stronger spending, a significant sign that the French economy continues to improve. INSEE also revised upwards its estimate for France’s GDP for the first quarter to 0.5%, up from 0.4% earlier in June. Still, inflation levels remain stubbornly low, as underscored by French Preliminary CPI, which dropped to a flat 0.0%.
This week’s ECB forum for central bankers in Sintra, Portugal was the talk of the markets. The meeting turned into the market-mover of the week (if not of the month), as the euro jumped 1.9%, while the pound soared 2.1%. The currencies posted the sharp gains after hawkish comments from Draghi and BoE Governor Mark Carney. Draghi was upbeat about the eurozone economy and put a positive spin on inflation, stating that "deflationary forces have been replaced by reflationary ones". Draghi said that the ECB’s stimulus program was needed for now, but would be gradually withdrawn once inflation moved higher. The markets read Draghi’s comments as a declaration that the ECB was planning to tighten policy. After the euro jumped, the ECB tried to dampen the stampede to snap up euros, with ECB sources saying that the markets had "misjudged" Draghi’s remarks. This impeded the euro’s rally, but only briefly. There was a similar reaction from the pound, which jumped above the 1.30 level for the first time since May after Carney left the door open for a rate hike. Carney appeared to backtrack from remarks last week, when he warned against rate increases in the near future. The impressive rallies by the euro and the pound could signal increased coordination among central banks, acccording to Stephen Innes, senior trader at OANDA:
"A game changer of a week as hawkish central bank commentary steamrolled the markets"… traders are now contemplating who will be next to join the lineup. No one wants to miss out on this party realising there’s a co-ordinated policy shift afoot and the chance to catch the removal of an easing bias is far too seductive for traders to ignore."
The US economy slowed down in the first quarter, but there was some good news on Thursday, as the revised GDP reading was raised to 1.4%, better than the initial estimate of 1.2% in May. The improvement was attributed to stronger consumer spending and an increase in exports. Earlier in the year, the markets were braced for a very poor quarter, with the first estimate in April projecting a gain of only 0.7%. Will we see better numbers in the second quarter? That may be a tall order, as consumer spending and manufacturing numbers in Q2 have missed expectations. Housing numbers have been mixed, and inflation remains below the Fed’s target of 2 percent. At the same time, the US labor markets remains very tight, with the unemployment rate at a 16-year low of 4.3%. Stronger global economic conditions have increased the demand for US products, boosting the export sector.
