Is a December hike possible?

The US Federal Reserve officials held off raising interest rates in September even though they said there was a reasonable argument for moving, according to the meeting minutes released October 12.

At their September 20 meeting, the Federal Open Market Committee voted 7-3 to leave interest rates unchanged. The minutes showed that several of those who supported the decision to wait on tightening policy, said the decision was a “close call” and several also indicated it would be appropriate to raise rates “relatively soon.”

The wording emphasized that the case for an interest-rate hike had strengthened, but that the Fed policy committee had decided, for now, to wait for “further evidence” of continued progress toward full employment and faster inflation.

Following the minutes’ release, investors continued to see about 60% chance of a rate increase in December, based on prices in federal funds futures contracts. As for November’s meeting scheduled a week before the US presidential election, markets are pricing about 9 percent chance of a move. It seems the market believes the Fed is passing on November and concentrating on their December meeting for their last shot at hiking rates in 2016.

Following the release, the President of the New York Fed, William Dudley advocated for a hike saying “I think we’re at a point where the economic expansion has plenty of room to run,” and that “the best thing that could happen for the US economy is to grow at a moderate rate for the next five to ten years and the unemployment rate to stay around 5 percent or lower.” That is the Fed’s aim according to his statement.

On the currency side, the US dollar continued to be broadly supported against most currencies due to a variety of issues. Renewed Brexit fears, rate hike hopes and markets volatility pushed the Dollar Index to a sevenmonth high at 98.129.

Furthermore political instabilities in various emerging markets have also seen the USD reach highs against many currencies. South African Finance Minister Pravin Gordhan was summoned to appear in court on fraud charges on November 2 leading the market to re-price the probability of sovereign rating downgrade.

In Turkey, the USD reached a high at 3.1128 TRY with weakness driven by political uncertainties after the attempted coup on the 15 of July. However, the real domestic driving force is the market’s fear that the Turkish central bank may cut rates too aggressively as the economy continues to slow down.

In the UK, economic data has held up well since the referendum however, hard Brexit fears have recently been reignited hitting hard the currency. European Council President Donald Tusk warned that the EU would not compromise on its insistence that freedom of movement will be a condition for Britain’s access to the single market and that UK cannot reap benefits of EU membership while barring European immigrants and rejecting EU courts’ authority. In his words, Tusk said “the brutal truth is that Brexit will be a loss for all of us. There will be no cakes on the table for anyone. There will be only salt and vinegar.” The GBP/USD continued its downward trend trading in tight ranges for most of the week but managed to move down to 1.2213 after starting the week off at 1.2430.

In the Eurozone, the EUR/USD moved lower amid the USD continued strength. While renewed rate hike prospects are not extreme at 60 percent they still helped the currency. The real focus will be on the European Central Bank next week and market participants will want to know whether policymakers have started discussing the prospects of tapering ECB’s QE. If Mario Draghi again denies this and delivers a dovish message, we are likely to see further losses for the currency. The EUR/USD pair opened the week at 1.1200 and moved down to 1.1058 throughout the week.

In Asia, demand for the safe-haven yen weakened after data earlier showed that China’s consumer price index rose 0.7 percent in September, beating expectations for an uptick of 0.3 percent. Year-on-year, consumer prices increased 1.9 percent last month, compared to expectations for a 1.6 percent gain. The positive report eased concerns over global economic growth after data on Thursday showed that China’s trade surplus narrowed to $41.99 billion in September from $52.05 billion the previous month. The USD/JPY pair opened the week at 103.00 and moved up to close the week at 104.18.

Job openings fall

The number of job openings decreased to 5.4 million in August, the US Bureau of Labor Statistics reported. July’s total job openings figure was revised lower, from 5.871 million to 5.831 million. On a net basis, that means that there were 6.65 percent fewer job openings at the end of summer than in the mid-summer report. Furthermore, hiring had previously been on the rise, but it slowed by almost 1 percent in August. Hires were 5.2 million and separations were 5.0 million. The report, combined with last week’s weaker than expected nonfarm payrolls, confirmed that the labor market is slowing and not as strong as it had been recently. While the JOLTS report is never a market-moving report, it is often closely watched by the Fed and is a key barometer of economic conditions, measuring job postings in different sectors, and the number of hires and layoffs.

Unemployment claims unchanged

In the week ending October 8, unemployment claims went unchanged from the previous week’s revised level at 246,000. The previous week’s level was revised down by 3,000 from 249,000 to 246,000. The four week moving average was 249,250, a decrease of 3,500 from the previous week’s revised average. This is the lowest level for this average since November 3, 1973 when it was 244,000. The previous week’s average was revised down by 750 from 253,500 to 252,750.

Retail sales rebound

Retail sales climbed in September by the most in three months, showing American shoppers began to spend freely again after shying away from merchants earlier in the quarter. The 0.6 percent advance followed a revised 0.2 percent decline in August, Commerce Department figures showed Friday. The core sales figure, used to calculate gross domestic product, rose a smaller-than-projected 0.1 percent.

Wholesale prices in the US rose by more than projected in September, helped by higher costs for energy and food and indicating inflation may be picking up. The producer price index increased 0.3 percent, the first gain in three months, after being little changed in August. The median forecast of economists surveyed by Bloomberg called for a 0.2 percent gain.

Europe & UK German sentiment

The ZEW Indicator of Economic Sentiment for Germany increased in October 2016. The index gained 5.7 points compared to the previous month, now standing at a level of 6.2 points (long-term average: 24.1 points). “The improved economic sentiment is a sign of a relatively robust economic activity in Germany. However, positive impulses from industry and exports should not distract from existing political and economic risks. In particular, the risks concerning the German banking sector are currently a burden to the economic outlook,” commented ZEW President Professor Achim Wambach. The assessment of the current situation in Germany has also increased. Gaining 4.4 points, the index now stands at 59.5 points.

Japan trade surplus

Japan’s current-account had a surplus of 2.0 trillion yen for August, supported by a pickup in trade in goods. The numbers come as the yen has appreciated 16 percent this year. Its strength has put pressure on Japanese exporters and threatened to undermine the nation’s trade surplus. However, cheap energy imports have generally kept the trade balance positive, supporting the current-account surplus.

According to the General Administration of Customs, China’s trade balance weakened more than expected in September. Chinese trade surplus slipped to 278.4 billion yuan in September, comparing to 346 billion in August. Meanwhile, economists forecasted a fall to 300 billion yuan. Overall, China’s September exports lost 10 percent from a year earlier, far worse than expected, while imports unexpectedly plunged after accelerating in August, hinting that signs of steadying in the world’s second-largest economy may be short-lived. Kuwait Kuwaiti dinar at 0.30280 The USDKWD opened at 0.30280 yesterday morning.