In fact, all week we have been contemplating a sluggish dollar strengthening, which unexpectedly gave way to a weakening on Thursday evening. Such a quick leap was caused by the statements of John Williams, who heads the Federal Reserve Bank of New York, and who is also a member of the Federal Commission on Open Market Operations. It is safe to say that the second member of the Federal Commission on Open Market Operations has openly announced his intention to vote for lowering the refinancing rate, not only at the end of July, but one more time before the end of this year. Yes, the market has long been ready for such a development of events, but it is based only on rumors, speculation and assumptions. In fact, only James Bullard not only openly expresses his opinion, but even during the last vote he voted just to soften the parameters of monetary policy. Now there are already two of them. And where there are two, there are three. In short, investors have received final confirmation that by the end of the year the Federal Reserve will reduce the refinancing rate twice. This was the reason for the sudden weakening of the dollar. Which, however, was short.
At the same time, the dollar had a serious reason for growth in the form of data on retail sales, whose growth rates accelerated from 2.9% to 3.4%. Not only does this growth in retail sales indicate a high likelihood of renewed inflation, but a number of other indirect data on inflation also indicated that its slowdown is temporary. So, retail sales data dispelled all doubts about further inflation dynamics. In addition, the total number of applications for unemployment benefits fell by 34 thousand instead of the expected 20 thousand. In particular, the number of initial applications, as predicted, increased by 8 thousand. And the turn, the number of repeated applications for unemployment benefits fell not by 28 thousand, and 42 thousand. And considering the fact that it is inflation and the labor market that are the main indicators for financial markets, it is not surprising that the dollar has steadily strengthened, and even Williams' speech only halted this process. But the question immediately arises: why then does the Federal Reserve plan to lower the refinancing rate twice already, if the most important indicators look very good. The point is in other indicators that reflect the state of other sectors of the economy, and they are not so joyful. For example, the growth rate of industrial production slowed down from 2.1% to 1.3%, while the utilization of production capacity decreased from 78.1% to 77.9%. Inventories rose another 0.3%, continuing to grow for twenty-five months. The combination of slower growth in industrial production and growth in stocks clearly indicates the growing risks of the development of a crisis of overproduction. In addition, the number of building permits decreased by 6.1%, while the number of construction projects started decreased by 0.9%. So the state of affairs in the American economy is really not as rosy as it may seem at first glance. Especially if you look only at the labor market and retail sales.
Europe responded with an unexpected increase in inflation, from 1.2% to 1.3%. But this did not impress the market at all. The dollar's growth only stopped momentarily. The fact is that everyone has long been accustomed to the periodic acceleration of inflation in Europe, which is rather quickly replaced by its slowdown. Mario Draghi can refer to various studies and scientific works, which predict a rapid increase in inflation from year to year. Who and now there. Moreover, the European Central Bank does not seem to believe all of these studies conducted on its request, otherwise it would not have postponed consideration of the issue of the refinancing rate in the middle of next year.
British statistics were also ignored, although they were clearly optimistic. Inflation remained unchanged, while the growth rate of retail sales accelerated from 2.2% to 3.8%. The situation is not bad in the labor market, where, despite the increase in the number of applications for unemployment benefits from 24.5 thousand to 38.0 thousand, the unemployment rate remained unchanged. Moreover, the average wage growth rate accelerated from 3.4% to 3.6%, and taking into account premiums, that is, with processing, from 3.2% to 3.4%. Although the latter indicator expected a slowdown. But here everything is connected with the expectations of the outcome of the election of the new head of the Conservative Party. All the more so about Brexit again reminded, and in a rather interesting form. For many, it was a surprise that the UK and the European Union continue to negotiate on this issue. Europe, which, through the words of Jean-Claude Juncker, has repeatedly stated that there will be no new negotiations and no concessions should be expected, it is still trying to find some compromise to avoid an unregulated Brexit, since its consequences are rather difficult to predict. But the very same Jean-Claude Juncker has repeatedly stated that Europe has already prepared the necessary regulatory framework, designed to protect Europe from the most negative consequences. But once negotiations continue, he is somewhat cunning. At the same time, the representatives of Great Britain are extremely optimistic about the course of the negotiations, but the Europeans openly say that the British are banal blackmailing them, demanding that they make inadmissible concessions, right now. If not, then Boris Johnson will become prime minister and immediately declare withdrawal from the European Union without a deal at all, and let Europe itself rake the consequences. In other words, the parties cannot come to a compromise in any way, and they just once again reminded everyone that the consequences of an unregulated Brexit are unpredictable. And it always scares investors much more than understanding what will be bad.
To be honest, this week there are not too many important macroeconomic data, and we will start with good news. Thus, housing sales in the secondary market of the United States should grow by 0.2%, and new homes, by as much as 6.6%. So expectations of rising inflation will receive new justification. Also, orders for durable goods can grow by 0.7%. Last but not least, preliminary data on business indices should fairly please investors. In particular, the business activity index in the services sector should grow from 51.5 to 51.6, and production from 50.6 to 51.4. As a result, the composite index of business activity may show an increase from 51.5 to 52.1. But the good news ends there. Although this is a lot. True, if this week the GDP growth rate for the second quarter does not come out, which will almost certainly show a slowdown in economic growth from 3.1% to 1.8%. And such a serious slowdown in economic growth will obviously greatly disappoint market participants. True, these data will already complete the week, so that during all the previous days the dollar will be able to continue to grow.
True, the dollar will be able to grow only if it does not interfere with the single European currency. But this is extremely unlikely. The fact is that, unlike the United States, preliminary data on European business activity indices should show a slightly different result. Yes, the production index can grow from 47.6 to 47.7, but in the service sector it is expected to decrease from 53.6 to 53.3. The result of all this will be a decrease in the composite index of business activity from 52.2 to 52.0. But of course the main event will be the meeting of the Board of the European Central Bank. True, its results will bring nothing, except for regular streamlined phrases about the need to closely monitor the situation, as well as the intention to return to the question of the size of the refinancing rate no earlier than the middle of next year. They may still refer again to new studies that already promise a year of rising inflation, which no one has seen in their eyes for many years. In other words, the dollar has no choice but to continue to grow, and it will be able to complete the week at a mark of 1.1150.
No macroeconomic data will be published in the UK, but even without this it will be a lot of fun, since on Tuesday the results of the election of the new head of the Conservative party, and the prime minister will be known. Virtually no one doubts that they will be Boris Johnson, who promised to withdraw the United Kingdom from the European Union in October. Obviously, the outcome of the victory of Boris Johnson will be precisely unregulated Brexit, with all its unpredictable consequences, so that the pound will be under severe pressure. It turns out that the pound will have to decline all week, and only on Friday this fascinating process will be stopped by data on the GDP of the United States for the second quarter. The benchmark for the pound is 1.2350.
