Fed Rate Hike: Less Than A 25% Chance (page 1 of 2)

US Dollar

After quiet Tokyo and London sessions for the majors, it was obvious market participants were waiting on the sidelines for the weighty US releases scheduled for the morning hours in New York. The indicators offered what is essentially a complete wrap up of the second quarter, with measures of growth and inflation well covered.

Annualized GDP garnered the complete attention of all the US capital markets. Expectations that the economy would slow to 3.0 percent in the second quarter proved too generous. Growth had actually slowed from 5.6 percent in the first three months to 2.5 percent. While this was not a wide difference from economists' predictions, it was exacerbated by the fact that only last week Fed Chairman Ben Bernanke told Congress that the bank's policy board would be more sensitive to the effects of previous interest rate hikes that usually have a lag before they are reflected in the economy.

Contributing to the distinct reduction in growth were slower component reads of trade, personal consumption, residential investment and business investment. The easing in business investment as an independent gauge was tempered somewhat by yesterday's strong durable goods orders. On the other hand, residential investment's draw on growth was an unquestionable reflection of high lending rates.

Beyond being merely a barometer for the effects of higher interest rates, it is also a leading indicator for future spending habits. As more and more Americans settle into their current abode, construction will slow and prices decline until equilibrium is once again found. Since most families have the bulk of their wealth tied up in housing, the declining values will erode confidence to spend and degrade the ability to borrow against ones house.

Meanwhile, as we said yesterday, an eye should be kept on the inflationary gauges. Core personal consumption expenditures complicated the Fed's ability to simply respond to growth issues, by accelerating 2.9 percent, the fastest it has been since 1994. Doubling concerns over price growth, the Employment Cost Index bested expectations with a 0.9 percent increase.

With Fed Futures now pricing in less than a 25 percent chance the Federal Reserve will hike the week after next, the market will look to next Friday's NFP and earnings figures to better judge the possibility of an 18th consecutive rate hike.

Euro

With the ECB's policy meeting on deck for next Thursday, today's minor economic data provided little thrust in the euro crosses. The biggest piece of data coming from the region was the Euro-zone's M3 money supply read. The indicator decelerated to an 8.5 percent pace of growth last month, while the previous number was revised down to 8.8 percent.

While under normal circumstances this may lend light speculation that the reduction to inflationary stimulus would make a rate hike less necessary, the shift has long been baked into market valuations. Elsewhere, numbers out of France were mixed. A measure of this month's consumer sentiment rose from -28 to -25, a complimentary measure to yesterday's rise in Germany's confidence indicator.

The other French figure drawing the market's attention was June producer prices, whose annual time-frame slowed on par with expectations to a 3.9 percent of growth, while the monthly figure grew only 0.1 percent. Next week, the European data is thick with Euro-zone confidence surveys, employment and retail sales. However, the market will not likely act to these indicators with big moves as most traders are awaiting the results of the ECB's meeting.