German unemployment and retail sales figures being released this morning

Good morning,

• FOMC very dovish despite ongoing improvement in the economy;

• Yellen may wait until Jackson Hole next month to discuss rate hikes;

• German unemployment and retail sales figures being released this morning;

• Eurozone inflation data less important, unemployment rate also being released.

European futures are looking a little mixed ahead of the open, following similarly mixed sessions in the US and Asia overnight. US stocks were initially off a fair bit but the Fed’s very dovish stance managed to drive some late gains to leave the S&P marginally higher on the day, while the Dow ended with a small loss.

The Fed announced another $10 billion taper and left interest rates unchanged at below 0.25%, which is exactly what the market was expecting. It was the statement that investors were really interested in as the economic data has improved dramatically in the second quarter, capped off with the first GDP reading yesterday showing the economy grew at a 4% annualised rate, ahead of expectations. Given that the first quarter figure was also revised higher to -2.1%, from -2.9%, I imagine many people’s outlooks for growth will paint a much more rosey picture now.

The only people that don’t seem to be getting carried away with the recovery is the Federal Reserve, or most members anyway. While it was always suggested that Chairwoman Janet Yellen is even more dovish than her predecessor Ben Bernanke, I don’t think everyone quite realised just how much more dovish a leader she would actually be. Yesterday’s statement was extremely dovish given the strides made in most areas of the economy, to the point that Charles Plosser, a known hawk, dissented.

I understand that there is still a significant amount of slack in the economy, as there is in the UK, but I get the feeling that the Fed, in effectively refusing to even discuss rate hikes, is putting itself in the position that when it finally does, the markets are going to go mental, something it has tried to prevent recently. Talk of rate rises could even come as early as next month, when Yellen will speak at the Jackson Hole symposium, an event that has been used many times in the past by the Fed Chair to drop a big hint of a coming change in monetary policy. I guess I just find it difficult to believe that the Fed is actually as dovish as it’s trying to appear which brings into question how transparent it is actually being.

Regardless, the markets are loving this while it lasts, so it may well be onwards and upwards from here, for the next month at least. With the Fed decision out of the way, traders will now turn to tomorrow’s jobs report and inflation data for further signs of improvement in the economy, including the amount of slack that still exists. That said, there is plenty of economic data being released today that shouldn’t be overlooked, despite it not necessarily being as important as yesterday’s or Friday’s numbers.

Of note this morning, we have the German unemployment data, which is expected to show a small decline in the number of unemployed with the rate remaining unchanged at 6.7%. It is worth noting that we’ve had similar expectations the last couple of months and each time unemployment has risen. We also have retail sales data for Germany this morning, which is expected to show a 1% increase in June.

The Eurozone inflation data is another one worth keeping an eye on, although following the ECBs decision a couple of months ago to announce a big monetary stimulus package, the numbers have lost some importance. Unless we see a significant decline in the inflation figures, the ECB is very unlikely to announce any further stimulus and instead insist that the current package needs time to feed into the economy. Eurozone unemployment will also be released this morning and is expected to remain unchanged at 11.6%.

Ahead of the European open, the FTSE is expected to open 4 points higher at 6,777, the CAC 11 points higher at 4,323 and the DAX 5 points lower at 9,588.