Warm-up be­gins for ‘Great US Rate Hike of 2016’

GLOBAL ECON­OMY WEEK AHEAD

Kuwait Times - - BUSINESS -

Sev­eral of the world’s top cen­tral banks will meet in the com­ing week, but only one, the US Fed­eral Re­serve, is set to start a fi­nal count­down on the sec­ond most an­tic­i­pated event of the year af­ter the Pres­i­den­tial Elec­tion. Fed Chair Janet Yellen and the rest of the Fed’s pol­icy-set­ters ap­pear to have left them­selves the De­cem­ber meet­ing to de­liver a rate rise in 2016, with hardly any­one ex­pect­ing a move only a week be­fore the Nov. 8 elec­tion.

If the Fed does go ahead the fol­low­ing month, as most in fi­nan­cial mar­kets and an­a­lysts polled by Reuters now ex­pect, it will have been a full year since the last in­crease and three short of the num­ber of moves the Fed had an­tic­i­pated back then. Apart from a sur­prise out­come in an elec­tion where nearly ev­ery poll puts Demo­cratic Party can­di­date Hil­lary Clin­ton sev­eral per­cent­age points ahead of Repub­li­can Don­ald Trump, the con­di­tions to jus­tify a lon­gawaited rate rise are lin­ing up.

Growth bounced back to an an­nu­al­ized 2.9 per­cent in the third quar­ter, at the high end of ex­pec­ta­tions, driven by in­ven­tory in­vest­ment and a re­bound in ex­ports. Cru­cially, nascent signs of in­fla­tion pres­sure - the miss­ing in­gre­di­ent up un­til now - are rat­tling sov­er­eign bond mar­kets around the globe, sug­gest­ing that few peo­ple are cling­ing to hope that the Fed will de­lay once more. The Fed­eral Open Mar­ket Com­mit­tee, which al­ready had three mem­bers vot­ing for a rate rise at the Septem­ber meet­ing, is ex­pected to make clear in its state­ment that it has taken note of these im­prove­ments, how­ever sub­tly. “With mar­ket ex­pec­ta­tions for a De­cem­ber hike run­ning higher this year com­pared with the same time last year, the Fed need not be as ex­plicit in its mes­sage of in­tent at this meet­ing com­pared with the Oc­to­ber state­ment in 2015 ahead of lift-off,” econ­o­mists at Mor­gan Stan­ley said.

“Nev­er­the­less, we ex­pect that a sim­ple change in the state­ment will send a clear mes­sage to mar­kets that, bar­ring any un­fore­seen hic­cups, the Fed is a go for a De­cem­ber hike.” Sev­eral im­por­tant US data re­leases should sup­port that view in the com­ing week, with man­u­fac­tur­ing growth ex­pected to hold up and al­ready-strong ex­pan­sion in the much larger non-man­u­fac­tur­ing in­dus­tries due to ac­cel­er­ate. The Oc­to­ber em­ploy­ment re­port at the end of the week is also fore­cast to show solid if not spec­tac­u­lar hir­ing - nor­mal this far into an eco­nomic ex­pan­sion - along with wage growth around 2.5 per­cent, above the rate of in­fla­tion.

Across the At­lantic, the Bank of Eng­land’s Mone­tary Pol­icy Com­mit­tee will meet to con­sider a dif­fer­ent kind of in­fla­tion chal­lenge from a very dif­fer­ent an­gle. The com­ing surge in im­ported in­fla­tion as a re­sult of the pound’s col­lapse since Bri­tons voted on June 23 to leave the Euro­pean Union has con­sid­er­ably nar­rowed the cen­tral bank’s wig­gle room for an­other rate cut be­low 0.25 per­cent.

BoE Gov­er­nor Mark Car­ney said on Thurs­day the MPC can’t ig­nore that “fairly sub­stan­tial” drop and there were lim­its to how willing the MPC would be to look through an in­fla­tion over­shoot, now ex­pected to be well above the 2 per­cent tar­get. “Of course, it is hard to say ex­actly how much of an over­shoot the MPC will tol­er­ate, but the very fact that the Gov­er­nor made this state­ment so soon be­fore the In­fla­tion Re­port does sug­gest a wari­ness about the in­fla­tion­ary im­pact of re­cent ster­ling de­clines,” econ­o­mists at In­vestec said. “And, if the Gov­er­nor has be­come scep­ti­cal about cut­ting Bank Rate in such con­di­tions, he will prob­a­bly build a con­stituency in the MPC to vote down any move to cut.” The ma­jor­ity of econ­o­mists polled by Reuters have pushed a rate cut off the ta­ble for this year, with some traders in fi­nan­cial mar­kets al­ready spec­u­lat­ing on the next move up.

The lat­est Bri­tish man­u­fac­tur­ing and ser­vices busi­ness sur­veys are due as well, but they aren’t likely to change a rate pic­ture dom­i­nated by con­cerns about the pound and what kind of re­place­ment trade agree­ments Bri­tain will set up - and how soon. The Bank of Ja­pan is due to meet early in the week, but few ex­pect it to make any changes to pol­icy af­ter re­cently im­ple­ment­ing an over­haul of its tools. More eas­ing is a way off, and is more likely to be a re­sponse to an ex­ter­nal shock. Gov­er­nor Haruhiko Kuroda’s tone of late sug­gests he has left be­hind his ag­gres­sive stance of the re­cent past, which has done next to noth­ing to boost in­fla­tion in Ja­pan. The Re­serve Bank of Aus­tralia is also fore­cast to leave rates steady on Tues­day, fol­low­ing cuts in May and Au­gust, ac­cord­ing to a Reuters poll of 60 econ­o­mists. — Reuters

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