From Societe Generale:
G10UK wage inflation and New Zealand GDP stole the show this week, while the euro hardly moved against the dollar despite the Greek debt impasse. Sterling peaked back in early July after BOE Governor Carney had expresed surprise in the Mansion House Speech that the market wasn’t pricing in much chance of a 2014 rate hike. Rates didn’t go up and the 2-year rate differential between the UK and US tightened by 75bp, dragging GBP/USD down from 1.72 to 1.46. But a dovish Fed (again, this week at the FOMC) and better UK data (as well as the jump in wage growth have seen solid retail sales) is reversing the rate move and squeezing cable shorts. New Zealand meanwhile is suffering from weaker Chinese demand for exports and saw a very soft Q1 GDP print of 0.2%. As for the rest of G10, USD/JPY traded in a 122.5-124.5 range this week, but we are wary of yen strength in a risk-off market. NOK fell as rates were cut.Weekly News SummaryThe most important event of the week was the FOMC meeting on Wednesday. The Fed left rates on old, as expected, but the market perceived a sufficiently dovish tone in Janet Yellen’s comments at the press Conference for the dollar to weaken and pricing of the Fed Funds path to come down. The term ‘gradual’ was much in evidence. The FOMC’s forecasts for growth this year were lowered but the ‘dot-plot’ of members’ estimates of where rates will go did not come down as much as expected – there are still two hikes implied for this year. The futures market now prices Fed Funds at 31bp at the end of 2015 and 1.04% at the end of next year.The rest of the data were mixed. Core PPI inflation slipped to 0.6% from0.7% and core CPI to 1.7% from 1.8%. Housing starts were soft, building permits strong. The Philly Fed index was strong at 15.2, the Empire State survey was weak and industrial production fell 0.2%.In Europe, all eyes were on Greek debt talks, all week, but nothing happened. There is no deal. A further request for additional ELA funding promoted a telephone ECB conference on Friday, and an emergency leaders’ meeting will be held on Monday after Christine Lagarde said that there was a need for more adults in the room for proper negotiations to take place. On the data front, employment increased 0.8% y/y, the current account surplus reached €22.3bn, and the ZEW dropped back slightly. But politics trumped economics.The UK released labour market data showing a slower pace of fall in unemployment but a pick-up in weekly wage growth to 2.8% y/y, more than expected. Annual CPI inflation at 0.1% is back in positive territory, while retail sales growth remains strong, with +4.4% y/y in volume terms excluding autos and fuel.There were rate cuts this week in Russia (from 12.5% to 11.5%) and Norway (1.25% to 1%). The SNB and the BoJ left policy on hold.