China plans to reduce the amount of foreign exchange. The probability of a rate hike from the US Fed has fallen to a low

The US PCE index for July, the Fed’s preferred inflation index, rose by 0.2% m/m and 3.3% y/y, in line with market expectations. The US core PCE deflator for July rose by 0.2% m/m and was 4.2% y/y, which was also in line with expectations. The dollar index rose by 0.45% on Thursday on the back of a strong US personal spending report (0.8% m/m), which pointed to the resilience of US consumer spending. The weekly initial jobless claims report showed a slight strengthening of the labor market. The number of claims fell by 4000 to 228,000.

Today, the US will release important data on the US labor market, namely the Nonfarm Payrolls report. Labor market indicators are expected to remain roughly the same. Economists believe that the labor market will add 169,000 jobs in August after 187,000 in July. The unemployment rate is expected to remain unchanged at 3.5%, and average hourly earnings growth is also expected to be unchanged at 4.4% y/y in August.

Atlanta Fed President Bostic said the following yesterday: “I think we should be cautious and patient and allow restrictive policies to continue to affect the economy so as not to risk tightening too much and cause unnecessary economic pain.” Markets rate the odds of a 25 bps rate hike at the September 20 FOMC meeting at 12%, while the probability of a 25 bps rate hike at the November 1 FOMC meeting has fallen to 36%.

In Europe, German retail sales fell by 0.8% m/m and 2.4% y/y, weaker than expectations of 0.3% m/m and 1.4% y/y. German unemployment rose by 18,000 (10,000 expected), indicating weakness in the labor market. The French consumer spending report showed an increase of 0.3% m/m and 1.1% y/y and matched market expectations. Eurozone preliminary CPI for August rose by 0.6% m/m to 5.3% y/y, which was stronger than expectations of 0.4% m/m and 5.1% y/y. Core inflation, which excludes food and energy prices, fell to 5.3% y/y from 5.5%. Steady inflation, along with a robust labor market, could force the ECB to raise rates higher this year.

Crude oil prices rose yesterday amid a report that Russia has agreed with OPEC countries to further limit production. Russia has already announced a 300,000 BPD production cut in September. On Wednesday, oil prices received support from a report that EIA weekly crude inventories fell more than expected to an 8-month low. Rising Iranian oil exports are boosting global supplies and weighing on oil prices. According to TankerTrackers.com, Iranian oil exports rose to a 5-year high of 2.2 million BPD in the first 20 days of August, with most of the oil headed to China.

Asian markets traded flat yesterday. Japan’s Nikkei 225 (JP225) rose by 0.88%, China’s FTSE China A50 (CHA50) fell by 0.43%, Hong Kong’s Hang Seng (HK50) lost 0.55% on Thursday, and Australia’s S&P/ASX 200 (AU200) gained 0.10%. Hong Kong’s Hang Seng (HK50) will not trade today due to a typhoon.

The People’s Bank of China (PBoC) said on Friday it will reduce the amount of foreign currency banks must hold as it tries to stem further weakening of the yuan and support the slowing economic recovery. The PBoC said it would lower the required foreign exchange reserve ratio (RRR) by 200 basis points to 4% from 6%, starting from September 15. The move will free up a significant amount of foreign exchange reserves in the country, especially dollars, which is expected to help support the yuan.