Chal­leng­ing months ahead for US

NBK MONEY MAR­KETS REPORT

Kuwait Times - - BUSINESS -

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

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