Challenging months ahead for US
NBK MONEY MARKETS REPORT
It was a historical week for the US and the global community where Donald Trump was elected to office after a long and gruesome campaign. With Trump president, it is very likely that the country’s policy uncertainty is expected to rise in response to the election results. Following the initial shock that took place after the announcement, global markets went into a panic mode. Markets quickly recovered after deciding to give Trump the benefit of the doubt and euphoria took place after the acceptance speech.
Indeed, signs of large-scale fiscal stimulus and indications that Trump could replace Fed Chair Yellen with a more hawkish successor in early 2018 encouraged investors to jump into markets and buy the US dollar. As mentioned above, markets witnessed extreme moves post-election results. After an initial move of USDJPY all the way up to 101.19 and EURUSD reaching a high of 1.1300 and an initial sell off of global equity markets, risk on mode took over and markets and stocks rebounded strongly with the USDJPY trying almost the 107.00 level. With these moves and the new President Trump, the probability of a Fed hike now stands at 86 percent for December. Moreover, St. Louis Fed President James Bullard stated that election related volatility shouldn’t affect the timing of a Federal Reserve interest rate increase.
On the treasury front, prices fell on 10year treasury notes and 30-year bonds, pushing yields to their highest levels in 10 months. Moreover, Trump stated during the campaign he would spend more on developing US infrastructure, which could increase the US budget deficit and treasury supply. For now, the political sector seems more optimistic with Republicans maintaining control of the Senate, though with a smaller margin than before as Democrats gained two seats. The chamber will have 52 Republicans to 48 for Democrats, which includes two independents. That will give Trump the upper hand in making nominations for the USD. Supreme Court in the coming years. In the House, all 435 seats were on the ballot across the country, and Republicans held on to control even after losing a handful of seats.
There has been considerable attention on Trump’s domestic economic policy proposals, including criticism of the Federal Reserve, broad based cuts to income tax and promises to increase defense and infrastructure spending. The deadline for submission of the Federal Budget is February 1st 2017. With the Republicans controlling the Senate and the House of Representatives, it is widely expected the deal will pass without any opposition. Moreover, markets expect president elect Trump to deliver swiftly on his campaign promise to repatriate foreign earnings of US corporate, which could have bullish dollar consequences with estimates of US cash stored abroad ranging from $1 to 3 trillion.
Market attention will also be focused on the future of the Federal Reserve. As Yellen’s term expires in February 2018, there have been speculations whether Yellen will resign as a result of Trump’s criti- cism. In the meantime, Trump will be able to change the composition of the FOMC as there are two vacancies on the Federal Reserve Board which could be appointed ahead of the FOMC’s first meeting in January, both of which will enjoy voting rights. Now that the market started to process the new president plans, it is clear that fiscal stimulus remains unlikely in the absence of a major negative shock or a potential recession.
On the currency front, the US dollar extended its rally north backed by the solid momentum in US treasury yields and rising expectations of a Fed’s hike by year-end. The dollar index opened the week at 97.358 and closed on Friday at 98.785. The pound sterling opened the week at 1.2511 against the US dollar and managed to reach high of 1.2673. The gains in the sterling’s value are good news for UK businesses which depend on imports. The biggest question remains whether the currency will eventually stabilize. The pound closed the week at 1.2599.
In the commodities sector, OPEC countries continue to face increasing urgency to take measures to support oil prices as Trump’s surprise victory threatens to deepen a market sell-off, especially after oil prices had already retreated about 15 per- cent since October on growing doubts that OPEC could finalize a deal.
Companies still eager to hire
The number of job openings in the United States rose slightly in September and remained near record levels, offering more proof companies are still willing to hire despite a somewhat slower economy. Companies were seeking to hire 5.49 million people in September, up from 5.45 million in August.
The rate of the people quitting returned to normal levels earlier in 2016 for the first time in eight years, another sign of a healthy labor market. Workers are more likely to quit when they get a better offer or think they can find a better job. In summary, the number of people hired in September totaled 5.1 million, but the hiring rate fell slightly by 0.1 percent.
The Federal Reserve’s easy money policies and the ultra-low interest rates have supported borrowers, since the financial crisis, although it’s squeezing banks’ lending profit margins.
In detail, the proportion of mortgages in which the borrower is 60 days or more behind on repayments dropped 8 percent from a year ago to 2.29 percent as of the end of September. That is the lowest since the records began in 2009. The declining rate of soured loans also partly reflects banks’ increased focus on higher quality borrowers. On the other hand, Americans are borrowing more to get better vehicles and taking longer to pay off the debt. Lower quality loans have been the fastestgrowing part of the market.
The number of Americans filing for unemployment benefits fell more than expected and declined from almost a threemonth high. Jobless claims fell by 11,000 to 254,000 last week but the four-week average of claims rose by 1,1750, which is a better indicator. In conclusion, unemployment benefits have been below 300,000 for 88 straight weeks, the longest streak since 1970, suggesting a healthy labor market.
Modest growth in challenging times
Economic growth in Europe is expected to continue at a moderate pace, due to recent labour market gains and rising private consumption. However, political uncertainty, slow growth outside the EU and weak global trade weigh on growth prospects. Moreover, in the coming years, the European economy will no longer be able to rely on the exceptional support it has been receiving from external factors, such as falling oil prices and currency depreciation. The European Commission expects GDP growth in the euro area at 1.7 percent in 2016, 1.5 percent in 2017 and 1.7 percent in 2018
German factory orders
German factory orders contracted unexpectedly in September following two months of gains, largely reflecting weak domestic demand and diminishing orders from euro area. New orders in manufacturing fell tremendously to negative 0.6 percent in September from 0.9 percent in August. Domestic orders decreased by 1.1 percent, foreign orders decreased by 0.3 percent and orders from the euro area were down by 4.5 percent.
UK production index
British industrial output fell unexpectedly in September, lowered by maintenance at North Sea oil and gas fields, although manufacturing growth picked up. As a remainder the below figures are the first quarterly estimate for index of production data post-EU referendum.
The quarterly industrial output decreased by 0.5 percent in the third quarter. However, manufacturing production picked up 0.6 percent, the biggest rise since April and marking a strong finish for manufacturing to an otherwise flat quarter. The pound’s weakness has boosted manufacturing export orders, but prices paid by factories for imported materials and energy are also on the rise, which will squeeze profit margins and boost inflation.
In Summary, Britain’s economy has coped well so far with the shock of the Brexit vote but most of its resilience has come from the dominant services sector.
The annual house price growth has softened this year compared with a year ago as increasing affordability pressures have constrained prices. On the other hand, very low mortgage rates and a shortage of properties available for sale should help support price levels. In detail, the price growth of houses eased to 5.2 percent in October from a year ago. However, house prices increased by 1.4 percent between September and October, although quarter on quarter change is a more reliable indicator of the underlying trend, which rose by 0.1 percent.
Kuwaiti dinar at 0.30345 The USDKWD opened at 0.30345 yesterday morning.
US Mortgage delinquencies