Notwithstanding poor economic data, risky assets strengthened as the August FOMC minutes signaled some members favored further easing. Wall Street, initially plunged, reversed early losses and ended the day higher. Oil prices rose for another day as driven by equities and another tropical storm. The front-month contract for WTI crude oil rose to a 3-week high of 89.21 before settling at 88.9, up +1.87%, while the equivalent Brent crude contract climbed for a 6th consecutive day, soaring to 114.25, the highest level since August 3, before closing at 114.02, up +1.91%. Gold jumped to 1845.1, the highest level in 4 days, amid renewed speculations on QE3. The benchmark Comex contract ended the day at 1829.8, up +2.13%.
The minutes of the August FOMC meeting unveiled that 'a few members' preferred 'a more substantial move at this meeting'. Some members favored additional easing as they expected 'the unemployment rate to remain well above, and inflation to be at or below, levels consistent with the Committee's mandate. However, they were willing to accept 'the stronger forward guidance as a step in the direction of additional accommodation' as this was 'a measured response to the deterioration in the outlook over the intermeeting period'. Policymakers discussed a range of accommodative tools which included reinforcing forward guidance about the likely path of monetary policy, additional asset purchases, increasing the average maturity of securities holdings, reducing the interest rate paid on excess reserve balances. However, the preference of the above tools was not shown.
Concerning the economic outlook, information received during the intermeeting period led members to revise down the projection for real GDP growth in the second half of 2011 and in 2012 'notably'. 'A couple of participants' worried that the 'exceptionally high level of long-term unemployment' could lead to 'permanent negative effects on the skills and employment prospects of those affected'. Concerning inflation, policymakers believed headline inflation has 'moderated' as 'prices of energy and some commodities have declined from their earlier peaks'. Members generally 'continued to expect prices to rise at a subdued pace in 2012'.
US' S&P/Case-Shiller Home Price Index fell -4.5% y/y in June, same as May's decline. However, consumer confidence deteriorated markedly to 44.5 in August from 59.5 in July. The market had anticipated a milder drop to 52.5. In the Eurozone, confidence deteriorated sharply in August. With exception of consumer confidence, all other indices fell much more than the market had anticipated. Consumer confidence dropped to -16.5 (consensus: -16.6) in August from a revised -11 in July. Economic confidence slipped to 98.3 while July's reading was revised lower to 103. Industrial confidence fell into the negative territory (-2.9) in August while the reading in July was revised down to 1. Services confidence dropped to 3.7, more than halving July's 7.9.
The market will focus on ADP employment change which probably added +103K of payrolls in August, falling from 114K a month ago. Chicago PMI index might have slipped -5.3 points to 53.5. In the Eurozone, unemployment rate probably stayed at 9.9% in August. Preliminary CPI might have risen to +2.5% y/y in August, same as July's reading but remained above ECB's +2% target.
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