Commodity markets started Friday on a weaker footing. There is a noticeable tilt to the downside in silver as high volatility should persist after falling almost 16% on Tuesday. Gold futures are also under slight pressure, but buying interest is expected to remain strong. Sales in commodity markets are occurring despite USD scratching intention to move out of the range, testing resistance near 94 level on Wednesday, as there were no strong disturbances in the news background on the night from Thursday to Friday.
It is important to point out that the risk of failure of US fiscal deal looms on the horizon although it is still low. Despite that there is perception that markets may be greatly unprepared to that outcome. Although the news background is full of reports that talks are under way, it has been two weeks since the expiration of major federal aid programs, and there are still no concrete details.
The data on claims for unemployment benefits indicated a sharp decline in the inflow of unemployed – minus 263K compared to the previous week. This is a direct consequence of the cut in weekly unemployment payments from $600 to $200 per week, which made unemployment so “unpopular”.
The data on industrial production in China indicated continuing struggle – YoY rebound in July came at 4.8% against the forecast of 5.1%. This is the “Chinese signal” that the recovery is slowing down. Retail sales continued their slide which is even more frustrating since lots of hope is pinned to its rebound. Retail sales decreased by 1.1% YoY in July. Weak data on the largest Asian economy has sobered the markets today.
Another piece of highly important economic release is the US July retail sales. They are important because fiscal negotiations are likely to be sensitive to the data clarifying recovery path. The data on job creation and unemployment rate released last week signaled that fiscal&post-lockdown economic impetus in the US was likely extended to July. Retail sales are expected to confirm this assumption. In my view, retail sales below consensus will strengthen market risk-on and press USD lower as strong confirmation of fading upturn will increase pressure on Republicans and Democrats and help to find a middle ground faster. At the same time, positive surprise will allow the process to be delayed further. However, the odds of a negative deviation in the retail sales report, in my opinion, is somewhat less than 50%.
The report on consumer confidence and inflation expectations from U. Michigan can hit US Dollar.
Why the data is on the market radar? The point is that if the report indicates an acceleration of inflation expectations above 3.0%, given the Fed’s stance, which does not even think about raising rates, real yields in the US will again be under pressure. For stocks, this will mean more upside, sales for USD and, of course, renewed interest for gold.
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