Tuesday's News Recap: ISM NMI Surprises to Upside, FOMC Holds Rates at 2.00%

News Recap | Written by CEP News | Aug 05 08 20:40 GMT |
(CEP News) - The North American trading day began with the morning release of the ISM non-manufacturing index, which showed an improvement in the U.S. services sector in July even though it remained in contraction. The other major event came in the afternoon, when the FOMC held interest rates at 2.00% and released a less hawkish statement on economic outlook.

The Federal Reserve announced Tuesday that it is holding the Fed funds target rate at 2.00%, as was widely expected. The accompanying statement was balanced between a concern for slowing growth and elevated inflation levels.

In the growth paragraph, the FOMC said "economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports." On inflation, the statement said energy and commodities prices have pushed inflation to "high" levels, which should moderate this year and the next, "but the inflation outlook remains highly uncertain."

The only dissenting voice in the FOMC decision was Dallas Fed President Richard Fisher, who preferred an increase in the target rate.

Economists from FT Advisors called the FOMC statement "more hawkish" compared to the June statement, and suggested it is consistent with the Fed raising rates later this year "but only if real economic growth shows that elevated energy prices and financial market turmoil are not throwing the U.S. back into recession or a prolonged period of weakness."

The services industry in the United States remained in contraction for the second month in a row in July, yet the sector improved more than expected to 49.5, according to the ISM Non-Manufacturing Index released Tuesday morning. Economists had expected a reading of 48.7.

The previous month's report saw a record-low in employment, a record-high in prices paid, and a slowdown in new orders and production. This month's employment decline was less severe, while prices remain elevated but moderated somewhat, as production and new orders each remained in slowdown.

"The most forward-looking components of this survey, new orders and employment, still remain below the key '50' level," said Sam Bullard, economist from Wachovia. "This suggests to us that the economy, while not technically in recession, remains uncomfortably sluggish."

Also earlier in the day, the Fed announced that Elizabeth Duke, former senior executive Vice-President and Chief Operating Officer of TowneBank, was sworn in as governor of the U.S. Federal Reserve on Tuesday morning. The Fed confirmed that Duke would participate and vote at today's FOMC meeting.

In other releases, retail sales rose by their biggest margin so far this year, advancing 2.9% on a year-over-year basis in the week ending Aug. 2, according to a weekly survey from the International Council of Shopping Centers (ICSC) and UBS Securities. Similarly, the Johnson Redbook retail survey recorded a 3.5% gain in the week compared to last year. Sales tax holidays in some states to spur back-to-school shopping were credited for part of the gain, the ICSC noted. On a week-over-week basis, however, ICSC-UBS sales were flat, following a 1.2% advance in the previous week.

Oil prices continue to free-fall on Tuesday, falling more than $2.60 to a three-month low of $118 a barrel. The decline was mostly due to concerns about a drop in demand.

There were no significant releases out of Canada on Tuesday.

Overseas, Asian markets received an unexpectedly dovish statement from the Reserve Bank of Australia following its decision to hold rates, while UK markets received an unexpectedly sharper contraction in industrial production.

As expected, the Reserve Bank of Australia's board decided to leave the cash rate unchanged at 7.25%, however, the statement accompanying the decision was dovish, with promises of rate cuts to come. "With demand slowing, the Board's view is that scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing," read the statement from the RBA.

The Office for National Statistics (ONS) reported that the UK industrial production level fell 1.6% year-over-year in June, deepening the 1.7% decline seen in the previous month. Economists had expected a fall of 1.2%, while May's reading was revised down from the -1.6% reported earlier. Month-over-month, industrial output in the UK fell 0.2% following the 0.9% decline seen in May, revised down from -0.8%.

Despite expectations of a 1.3% decline, euro zone retail sales contracted by a full 3.1% in June year-over-year, adding to the 0.1% fall seen in the previous month. May's figure was revised down from the +0.2% initially reported. On a monthly basis, retail sales in the monetary union slipped 0.6% as expected following May's 0.5% gain, revised down from an initial reading of +1.2%.

In an interview with BBC Radio 4 on Tuesday, UK Chancellor of the Exchequer Alistair Darling suggested that a windfall energy tax was not especially practical for the UK and said that he saw "problems" with such an idea. Darling added that he would be aiming to pressure energy companies to help struggling customers, rather than having those firms taxed.

By Stephen Huebl, shuebl@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , with contributions from Patrick McGee, pmcgee@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , Erik Kevin Franco, efranco@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , Todd Wailoo, twailoo@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it and Steve Stecyk, sstecyk@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , edited by Sarah Sussman, ssussman@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it

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