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Fed head honcho Yellen had another testimony, along with a couple of Fed officials, but was still unable to provide much clarity on the timing of rate hikes and the balance sheet runoff.

  • U.S. headline PPI up by 0.1% vs. projected flat reading in June
  • U.S. core PPI posted 0.1% uptick vs. estimated 0.2% gain
  • U.S. initial jobless claims at 247K vs. 245K consensus, 250K previous
  • U.S. federal budget deficit widened from $88.4B to $90.2B vs. $36.2 estimate
  • Fed head Yellen: Rise in long-term market rates expected during runoff
  • Yellen: Yield curve would be a factor in future rate adjustments
  • Yellen: Inflation risks are two-sided, tight labor market to put upside pressure

Major Events/Reports

Mostly upbeat U.S. data

Medium-tier reports from Uncle Sam were mostly better than expected, setting the stage for potential upside surprises in Friday’s data dump.

Headline PPI rose by 0.1% instead of posting another flat reading as expected while the core PPI also printed a 0.1% uptick, short of the estimated 0.2% gain and slower than the earlier 0.3% increase. Components of the report indicated that the readings were shored up by higher prices of final demand services, which chalked up its fourth consecutive monthly gain.

Keep in mind that changes in prices that producers pay for goods and services are usually passed on to the consumer, so positive PPI readings tend to translate to higher CPI.

Meanwhile, the initial jobless claims report yielded a 247K reading for the previous week, lower than the earlier 250K increase and indicative of sustained momentum in hiring.

Another speech by Fed head Yellen

Fed Chairperson Yellen grabbed the mic once more to share her thoughts on the U.S. economy and central bank policy. As in her earlier speech, she tried to strike a balanced tone and refrain from giving any strong hints on future rate hikes.

Yellen did mention that the balance sheet runoff, which might kick off later this year, could result to a rise in long-term market rates. She also pointed out that policymakers will be watching the yield curve before making interest rate adjustments. This led many to speculate that a significant increase in long-term rates owing to balance sheet unwinding might discourage the Fed from hiking the actual benchmark rate later on.

As in yesterday’s market reaction, global bond yields chalked up yet another drop due to Yellen’s cautious tone. Fed officials Kaplan and Brainard also reiterated their previous remarks on wanting to see stronger inflation before increasing rates again, leading many to doubt that a September or December hike is in the bag.

 

Major Market Mover(s):

NZD & AUD

After some profit-taking at the start of the session, the Kiwi continued to dominate against its forex peers as investors seem to be searching for higher returns in the midst of declining bond yields. The Aussie trailed closely behind.

NZD/USD advanced from a low of .7307 to a high of .7328, AUD/USD is up from .7712 to .7740, NZD/JPY rallied from 82.86 to 83.11, and AUD/JPY popped up to 88.21.

CHF

In contrast, the franc was the biggest loser for the day as risk-taking picked up and traders seemed to be in no mood for negative interest rates.

USD/CHF is up from .9642 to a high of .9688, NZD/CHF jumped from .7034 to a high of .7117, AUD/CHF is up from .7408 to .7523, and EUR/CHF bounced to a high of 1.1039.

Watch Out For:

  • 5:30 am GMT: Japanese revised industrial production m/m (another 3.3% drop expected)