Whatever it takes, to keep the euro lower
NBK MONEY MARKETS REPORT
Since the latest strong employment report, market confusion continue to be the main theme. As the odds of a rate hike in December have almost reached 70 percent, the dollar continues to be supported at least for the next month by a potential hike in interest rates.
Fed officials have been speaking this week and moving market expectations closer to the Fed dots. Federal Reserve of New York, Dudley gave hints about approaching a rate hike by saying policy should be tightened only slowly after lift-off. Fed vice chairman Fischer also said the Fed’s decision to delay raising rates has helped to offset economic headwinds caused by a stronger Dollar.
Having endured a poor performance during September and October, the US dollar is slowly becoming a scarce commodity. Whether by devaluing their currencies using negative interest rates, or turning surpluses into deficits, countries are scrambling to find cheap funding sources after taking major hits against the USD in 2015.
Adding insult to injuries, ECB President Draghi reiterated this week again that the ECB was willing to do whatever it took to revive the European economy. Although we do not think it would make sense to raise the amount of QE in December by looking at the latest economic figures out of Europe, dropping rates more into negative might make more sense for the ECB to force banks into opening more aggressively their balance sheet. In summary, on the foreign exchange side, the dollar index ended the week mostly unchanged against the majors consolidating the recent gains. US data continue to show a strong US economy and expectations of a December rates hike continue to move higher.
If anyone had any doubt, the euro has now become the funding currency of choice on the back of the ECB actions. This week, Draghi’s comments were fairly cautious on growth and inflation and noted that the downside risk to global growth and trade were clearly visible. He also added that signs of a sustained turnaround in core inflation have somewhat weakened. Draghi basically signaled that more easing was coming adding to the other ECB speakers. It now seems that an extension of QE and a cut in the deposit rate could be inevitable. After attempting to move higher above the 1.08 level, the Euro closed the week back to the same level of Monday at 1.0773.
With UK headline inflation at historic lows and household price expectations edging down again, the Bank of England has been able to point to better wage growth as evidence that inflation will return to target in two years’ time. Late this week, Bank of England Chief Economist Haldane stuck to his dovish stance, saying that in his view the first BoE rate hike is still a long way off. Clearly the dovish picture disappointed investors who started to look at the downside for the Sterling. The Pound ended the week at 1.5237.
This week’s final release of Japan’s Industrial production for September showed a slightly stronger rebound in outputs, but such data offered no support to the JPY. After opening on Monday at the 123 level, the Yen ended the week at 122.61.
Commodities remain under pressure as Brent and crude fell -3.8 percent and -2.8 percent respectively on Thursday and again on Friday. Copper fell -2 percent to the lowest since July 2009. Sentiment was weighed down by somewhat hawkish Fed speakers which clearly did little to ease the anxiety ahead of the December Fed meeting. The commodity weakness was perhaps also an ongoing reflection of the perceived sluggishness in China’s underlying economy. Indeed, this week soft bank lending, trade, inflation and industrial data, have all put more emphasis on worries about Chinese growth.
Wage inflation
The National Federation of Independent Business optimism survey for October was unchanged relative to September at 96.1, but slightly lower than expectations of 96.4. The October import price index reading was down -0.5 percent on a monthly basis versus -0.1 percent expected which puts the yearly rate now at -10.5 percent.
In parallel, the rate of job openings in the US has improved the most among the series. The series bottomed in July 2009 and rose to a record high in July 2015 before slipping slightly in August.
Last but not least, the quits rate has remained unchanged at 1.9 percent from April through August. It is important to note that when people voluntary quit their job, it is typically a sign of economic strength and confidence in the labor market outlook. The modest rise in the quits rate from its recession low suggests that the recent firming in wages is unlikely to reverse.
Europe & UK
According to newspapers, the ECB is considering the possibility of buying debt of cities and municipalities as part of its asset purchasing program, possibly as soon as March 2016. Papers suggested that almost $500bn of bonds issued by cities in circulation currently were studied, with the articles suggesting that all options are being considered. There was little mention of the possibility of buying corporate debt other than it being ‘much sought after and therefore difficult to buy’ according to the article. Investors look at this as a clear dovish hint from the ECB that some sort of further stimulus is likely. While the expansion into cities and munis wouldn’t materially raise the overall universe, it does potentially increase the time horizon for countries seeing a shortage of assets.
While noting that the decision is yet to have been made, ECB board member Coeure confirmed that ‘the debate is open’ with regards to possible further easing. Coeure added that euro area growth is accelerating ‘but it remains weak, while inflation expectations have stopped improving and underlying inflation has hit a ceiling’.
Europe continues to steal growth
French industrial production was up +0.1 percent on a monthly basis during September after expectations for a decline; helping to lift the yearly rate up to +1.8 percent. Manufacturing production 0.0 percent month on month versus expectations of - 0.5 percent also beat consensus. France’s gross domestic product expanded 0.3 percent in the third quarter from the second, in line with economists’ expectations.
In parallel, German quarterly GDP slowed to 0.3 percent from the previous figure of 0.4 percent reflecting the impact of weaker demand for the country’s exports from China and other large developing economies. However, the annualized GDP ticked higher to 1.7 percent from 1.6 percent. A decline in investment was another weak spot for the German economy, while consumer spending was the main driver of growth. Germany’s consumers remained positive in light of a tight labor market and bright jobs prospects, while in France, falling prices for household energy and fuel are boosting households’ disposable income.
UK employment remain strong
UK Q3 unemployment dropped to the lowest level in more than 7-years. Although employment increased 177,000 to 31.2 million, the number of people claiming unemployment related benefits rose by 3,000 in October double the forecasted number. Additionally, employee average earnings only rose 3 percent against 3.2 percent expectations. Finally, the unemployment rate unexpectedly decreased 0.1 percent over the same period to 5.3 percent beating expectations.
On a different front, in its quarterly inflation report, the Bank of England said “the outlook for global growth has weakened since August”. It blamed emerging market economies for that weakness, saying growth in those regions had “slowed markedly”. While the Bank expects inflation to rise above its 2 percent target in two years, it said that risks “lie slightly to the downside” during that time period. In other words, inflation may not rise as quickly as the Bank forecasts. As a consequence, forecasts for the first change in interest rates have been pushed further into the future.
Asia and commodities
Chinese trade was much weaker than a year ago in October. As exports were falling much quicker than imports, China recorded a record $61.6bn surplus for the month. Exports on one hand fell 6.9 percent, compared to a 3.7 percent fall in September. Economists expected some improvement, forecasting a 3.2 percent fall, but weak global demand and higher Chinese costs led to lower exports. On the other hand, Chinese imports fell 18.8 percent, also lower than expected, however with a slight improvement from the 20.4 percent yearly fall in September.
Different data were slightly more optimistic. Retail sales during October were up more than expected at +11.0 percent on a yearly basis versus consensus of +10.9 percent, up from September. However, industrial production declined last month to +5.6 percent on a yearly basis from +5.7 percent the previous month and below expectations of a rise to +5.8 percent. Lastly fixed asset investment was down last month, although in line with consensus at +10.2 percent on a yearly basis.
China’s economy is gradually shifting from manufacturing to services, as it becomes more dependent on consumer spending. For the moment, Beijing is likely to focus on policies to help domestic demand, increasing expectations that the People Bank of China would add further easing measures, and increase direct lending to infrastructure projects.
Australia
A much stronger than expected employment report and lower than expected unemployment rate at 5.9 percent compared to expectations of 6.2 percent in October were the main news in Australia this week. Clearly, employment is continuing to strengthen and the unemployment rate is trending down. The RBA should definitely be pleased with these figures as the data provide further support that the strengthening non-mining sectors of the economy are more than offsetting the drag from weakness in mining. The RBA appears to be coming to that same conclusion as evidenced in its recent November Statement of Monetary
Oil glut not going away
Commodities markets tumbled sharply lower this week. Crude oil finished the week down over 7 percent to close back below $42 for the first time since August. Brent was weak too, finishing down over 7 percent and back below $45. For now, it seems there are no shortages of fresh negative headlines on a daily basis suggesting the glut in prices is set to be prolonged. In addition, the latest American Petroleum Institute numbers showed inventories increased by 6.3m barrels last week which was far higher than analyst expectations of 1.1m.