Closing Market Recap: U.S. Dollar Bulls Trample Commodity Prices

Market Updates | Written by CEP News | Jul 22 08 21:10 GMT |

(CEP News) - A decline in commodity prices and signs the Federal Reserve may hike interest rates sooner rather than later sparked a rally in the U.S. dollar and a selloff in fixed income. The fall in commodities also helped U.S. equities strengthen but hurt the Canadian stock market. The commodity complex was under pressure on signs of demand destruction. Energy prices also fell after the U.S. National Hurricane Center said Tropical Storm Dolly will likely miss most U.S. offshore production and refining capacity. WTI crude oil was down $3.40 to $128.42. The front month gold contract at the Chicago Board of Trade was down $19.60 to $944.50 per ounce. Mathieu Noel, commodities futures trading specialist at Scotia McLeod, said he expects oil to test technical support at $122 in the coming weeks before rebounding. In the near term, he expects Wednesday's U.S. report on petroleum inventories to determine prices. Comments from Philadelphia Fed President Charles Plosser were an important driver in markets. Plosser said inflation in the U.S. is "too high" and inconsistent with the goals of the Federal Reserve. He said monetary policy is too loose and the Fed will likely have to hike rates before an economic turnaround has taken place. Plosser is generally seen as one of the more hawkish Fed governors but his comments sent bond prices lower and the greenback higher. "The hawkishness of his remarks this morning might not come as a surprise. Nonetheless, they do add to the increasingly strident anti-inflation rhetoric coming from the regional Federal Reserve Bank Presidents," wrote JPMorgan U.S. economist Michael Feroli in a note to clients. Fed fund futures traders ratcheted up expectations of rate hikes. The implied probability for a hike in September rose to 48% from 41% on Monday. Treasuries also sold off on a soft 20-year TIPS auction. U.S. two-year yields were up 12.4 bps to 2.72%, with five-year yields up 11.5 bps to 3.48%, 10-year yields up 7.1 bps to 4.11% and 30-year yields up 4.8 bps to 4.67%. The U.S. dollar benefitted from Plosser's comments and the decline in commodity prices. "When you look at currencies from top-to-bottom, you've had an average decline of 0.75% against the U.S. dollar," said John Rothfield, senior currency strategist at Bank of America. The Canadian dollar was no exception, it fell 0.0087, or 0.82%, to 0.9914 (1.0086 USD/CAD). Rothfield said the loonie was also pressured by the commodity price decline and a soft report on retail sales. Economists were expecting Canadian retail sales excluding autos to increase 0.7% in May, but sales were only 0.4% higher. The miss was partly mitigated because April's figure was revised to 1.2% from 1.1%. Including autos, retail sales increased 0.6%, but that number falls to 0.1% if gasoline station sales are excluded. "Retail spending has been one of the drivers of the Canadian economy and it's still been a fairly strong quarter so I don't think it was a particularly big factor [in the Canadian dollar's decline]," Rothfield said. Aside from the declines against the U.S. dollar, the loonie was relatively stable. It declined 0.10 to 106.36 against the yen. The euro was down 0.0142 to 1.5781 against the U.S. dollar, down 0.0004 to 1.5917 against the Canadian dollar, down 0.0022 to 0.7924 against the pound sterling and was lower by 0.19 to 169.29 against the yen. The pound sterling was down 0.0120 to 1.9913 against the U.S. dollar and up 0.0051 to 2.0084 against the Canadian dollar. The U.S. dollar was up 0.84 to 107.28 against the yen and the Dollar Index is up 0.482 to 72.472. Toronto's S&P/TSX composite index closed down 46 points to 13,643, the Dow Jones industrial average up 135 points to 11,603, the S&P 500 up 17 points to 1,277 and the Nasdaq up 24 points to 2,304. European stock markets closed in mixed territory with the Eurostoxx down 20 points to 2,831, the UK FTSE 100 down 40 points to 5,364 and the German DAX up 18 points to 6,443. Yields on two-year Canadian government bonds are up 4.8 bps to 3.22%, with five-year yields up 4.5 bps to 3.46%, 10-year yields up 3.4 bps to 3.85% and 30-year yields up 1.2 bps to 4.16%. The Canadian 10-year note is yielding 26.35 bps less than the U.S. 10-year note. In Germany, returns on two-year German bonds are down 3.2 bps to 4.59%, with five-year yields down 1.5 bps to 4.65%, 10-year yields up 0.6 bps to 4.64% and 30-year yields flat at 4.87%. Yields on UK two-year bonds are down 6.6 bps to 5.04%, with five-year yields down 5.6 bps to 5.00%, 10-year yields down 5.4 bps to 5.00% and 30-year yields down 3.6 bps to 4.63%. Canadian data will remain the focus in the day ahead with the release of the June consumer price index. The chief inflation measure is expected to rise to 2.9% year-over-year from the previous 2.2% print. Fergal Smith, managing market strategist from Action Economics, said while a rise in inflation might raise some eyebrows, it won't have a big impact on the Bank of Canada monetary policy. "The bank is already projecting a peak of 4.0% in inflation by 2009 so I don't think they will be too concerned with tomorrow's report. I think the bonds are going to continue to trade off equities and what is happening in the U.S. If inflation shows signs of accelerating then it might raise some concerns. We have pencilled in rate hikes in the first half of 2009, which is what the market expects." The focus overnight will be on the Australian CPI. The second quarter report is expected to rise to a 7-year high of 4.3% year-over-year. In the U.S. there will be a $31 billion 2-year auction, and the Beige Book anecdotal report on regional economic conditions. All data taken at 4:36 p.m. EDT. By Adam Button, abutton@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , edited by Cristina Markham, cmarkham@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it CEP Newswires - CEP News © 2008. All Rights Reserved. www.economicnews.ca The Copying, Broadcast, Republication or Redistribution of CEP News Content is Expressly Prohibited Without the Prior Written Consent of CEP News. A copy of CEP News disclaimer can be found at http://www.economicnews.ca/cepnews/wire/disclaimer.