US election; Big changes ahead or status quo
NBK MONEY MARKETS REPORT
KUWAIT: The US dollar remained under pressure against the low yielders this week as US election stories continue to be at the center stage with markets ignoring the neutral November FOMC decision.
As expected the Fed decided to keep interest rates on hold. Boston Fed President Rosengren left members George and Mester as the only two hawks calling for an immediate 25bp rate hike. While Rosengren’s U-turn may have come as a surprise, it does not call into question an eventual December tightening for now.
The FOMC statement rather highlighted that the case for an imminent rate hike has further strengthened over the past six weeks, with the Fed in particular delivering a more upbeat outlook on inflation. The Fed acknowledged that the inflation has been moving higher since the beginning of the year, while also removing the sentence that “inflation is expected to remain low in the near term”.
Overall the statement language change was little changed as it revealed that the case for an increase in the fed funds rate has ‘continued to strengthen’ and that they now need just ‘some’ further evidence on progress towards objectives to move rates. By the end of the week the market has priced a 78 percent probability of a December hike.
On the data side, the US economic releases have struggled to give the USD much support as investors remain in a wait and see mode until more clarity is given on November 8. Regardless, further evidence that the US recovery is regaining traction and spare capacity continues to shrink within the US labor market, could raise the prospect of a December tightening if no major surprises come from the election. For now, worries continue to be that Trump wins, the market conditions could continue to worsen for the US Dollar as he spoke many times about using excessive debt to boost the economy and run a large budget deficit.
On the currency side, the USD continues to be under pressure as of late with the increased uncertainty cause by a possibility of Donald Trump taking US politics into new territory. This is why the Yen and Swiss franc were well supported this week while any close related partner to the US has been bearing the brunt of the nervousness about the impact of a President Trump on international trade and relations.
In summary, the euro opened the week at 1.0981 and reached a high of 1.1143 after a non-event FOMC meeting. The Yen also continues to be well supported mainly after the BoJ pushed their inflation target till 2019.
The pound sterling managed to hang on to some gains achieved this week following news that the UK government lost the High Court case on Article 50 and a less dovish BoE, introducing 2-way risk on the rate outlook. The Pound opened the week at 1.2195 and closed on Friday at 1.2516.
According to the ADP report released this week, private sector employment rose by 147,000 jobs in October, below expectations of 165,000, the smallest increase since May. ADP also revised job creation numbers for other months as part of a new measuring model. For September, the number of total jobs added was revised up to 202,000, from a previous estimate of 154,000.
On the negative side, construction companies reduced the effective by 15,000 in October, the private education sector also lost jobs. Natural resources and mining companies also cut 2,000 net jobs. The sector has been reducing payrolls for nearly two years due to oil prices. On the positive side, professional and business services firms added 69,000.
ISM Non- manufacturing
Non-manufacturing ISM remained strong in October coming at 54.8, down 2.3 percent from September. Each of the report’s four key metrics, declined from September to October. Business activity and production fell 2.6 percent at 57.7, new orders were off 2.3 percent to 57.7. Employment was however off 4.1 percent to 53.1 and grew for the fifth straight month. According to the report, thirteen nonmanufacturing industries saw growth in October including Construction and real Estate. The industries contracting in October included again mining.
In summary, the report was largely positive mainly, “a slow growth in October, coming off of huge uptick in September. Over all, both business activity and new orders are still very strong, and employment is a cycle thing, as last month’s strong hiring pace cannot really be sustained for a long period. It’s still a decent report.”
The employment situation
US jobs continued to gain at an acceptable pace in October, signs indicate that the labor market and the economy made a steady progress at the start of the fourth quarter. In detail, total nonfarm payrolls rose by 161,000 in October, down by 30,000 from September. So far in 2016, employment growth has averaged 181,000 per month, compared with an average monthly increase of 229,000 in 2015.
The unemployment rate was little changed at 4.9 percent and in line with expectations. Employment continues to trend up in health care, business services, and financial activities. The average hourly earnings in October was 0.4 percent versus a forecast of 0.3 percent, and up by 0.1 percent from the previous month. The year to year increase was 2.8 percent, compared with 2.7 percent in September. In conclusion, the figures are likely to keep the Federal Reserve on track to raise borrowing costs next month for the first time in 2016.
Europe & UK
A surge in Europe’s Manufacturing PMI lead by Netherlands and Germany
Eurozone final manufacturing PMI figure came strong at 53.5 in October versus September’s figure of 52.6. Manufacturing sector has been gaining traction and momentum at the start of the final quarter of this year. Growth of production, new orders, new export order and employment all accelerated, while price pressures showed further signs of increasing. The Netherlands surged to the top of the Manufacturing PMI rankings in October, with growth accelerating to a 15month peak. Germany was also a top performer, expanding at the quickest pace in almost three years.
Inflation expectations for October came at the highest level since June 2014, a sign that monetary policy is gradually eliminating deflation. The Consumer price index rose to 0.5 percent in October, up from 0.4 percent in September.
End of year respite for the BoE
Three months ago, the Bank of England decided to cut interest rates to 0.25 percent and resume bond buying, while warning that an immediate downturn in UK growth could pave the way for additional easing as soon as November.
This week however, the Bank kept interest rates at a low of 0.25 percent and dropped plans to cut them further in the near future, although the inflation warning was tempered with a projection that economic growth will be much stronger than previously forecast in the near-term.
Moreover, the Bank warned households to expect a sharp rise in inflation next year as the weak currency increase costs of imports and squeezes family finances. Predicting rises in import prices, the Bank said inflation would rise from 1.3 percent this year to 2.7 percent in 2017 and 2018, higher than in its last set of forecasts three months ago. In its new outlook, the monetary policy committee said it would take until 2020 for inflation to get back to the target of 2 percent.
On Thursday, the High Court ruled against the government triggering of Article 50 without a parliamentary vote. After the ruling, the government chose to appeal the High Court’s decision however the appeal is likely to be heard at the Supreme Court on 7th and 8th December and the government has the right to withdraw it before the hearing.
The decision was welcomed by global markets and was significant as it reduced the chances of a hard Brexit as markets were pricing. If the government’s appeal is rejected, the government will have to seek parliamentary approval for starting the Brexit process. In sum, it has weakened PM May’s Brexit position further and makes a new general election next year a likely scenario, either before or after the triggering of Article 50.
As the Sterling Pound was under pressure since the “Brexit’ vote, the immediate pressure was relieved and a move higher in GBP may have further to run in the near term, particularly with the market caught short.
UK GDP defying estimates
The UK GDP figures were also out this week defying estimates that the country would go into recession if the UK voted to leave the EU. In detail, GDP came at 0.5 percent increase from July to September compared to the previous three months. According to the UK chancellor “the fundamentals of the UK economy are strong, and the data show that the economy is resilient. The economy will need to adjust to a new relationship with the EU, but we are wellplaced to deal with the challenges and take advantage of opportunities.”
According to the report, the figures gave “the most comprehensive picture so far of the post-referendum UK economy. The economy has continued to expand at a rate broadly similar to that seen since 2015 and there is little evidence of a pronounced effect in the immediate aftermath of the “Brexit” vote. Most of the upside surprise was on the back of a still strong services sector expanding at 0.8 percent while the three other sectors, mainly industrial production, construction and agriculture remained in a contracting mode. Compared with the same period last year, growth from July to September 2016 was 2.3 percent higher.
BoJ keeps policy unchanged
The Bank of Japan’s monetary policy announcement came in line with expectation by keeping the policy rates unchanged at 0.10 percent. The BoJ also stated its Japanese government bonds purchases will be maintained at more or less the current pace, at an annual purchase of JPY80tn. Moreover, they cut FY16 core inflation forecasts to -0.1 percent, the first time below zero since April 2014. The central bank has pushed back the time frame for reaching its inflation target of 2 percent at some time during or after the 2018 fiscal year which ends March 2019, the fourth extension since Kuroda took office in 2013.
Promising China figures
In China, official manufacturing PMI figure reached a surprising 51.2 in October, the highest level since 2014 and exceeded all market expectations. Furthermore, non-manufacturing PMI also edged up to 54 from 53.7. The economy in China seems to be gaining traction in Q3 and the momentum is expected to carry on till the end of Q4 relieving pressure from policymakers due to the growing concerns on the real estate sector and debt levels in the country.
The RBA left interest rates unchanged as expected in November though the Bank has acknowledged that house prices are rising quickly in some markets.
Inflation is likely to run a little lower than the Bank expects over 2017, with a mid-year rate cut in 2017 still more likely than not in our view. vThe trade deficit narrowed more than expected in September reflecting a rise in coal export values and volumes, while construction approvals fell in September, though they remain at elevated levels.
Kuwaiti dinar at 0.30220 The USDKWD opened at 0.30220 yesterday morning.