US elec­tion; Big changes ahead or sta­tus quo

NBK MONEY MAR­KETS RE­PORT

Kuwait Times - - BUSINESS -

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.

Dis­ap­point­ing fig­ures

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.

Kuwait

Kuwaiti di­nar at 0.30220 The USDKWD opened at 0.30220 yes­ter­day morn­ing.

Newspapers in English

Newspapers from Kuwait

© PressReader. All rights reserved.