An ex­plo­sive bullish run for the US dol­lar

NBK MONEY MARKETS RE­PORT

Kuwait Times - - BUSINESS -

KUWAIT: Last week, the US dol­lar ex­ploded higher against most all the ma­jors on the back of bet­ter US data, sup­port­ing rate hike ex­pec­ta­tions in the mar­ket and a con­tin­u­a­tion of the Trump elec­tion shock. Ex­pec­ta­tions of a rate hike in De­cem­ber have reached 85 per­cent as the US econ­omy con­tin­ues to re­lease pos­i­tive fig­ures across all sec­tors, es­pe­cially man­u­fac­tur­ing. Ad­di­tion­ally, fis­cal pol­icy im­ple­men­ta­tions promised by Pres­i­dent elect Trump have dic­tated the markets’ out­look of a strong Dol­lar theme.

The Dol­lar In­dex opened the week at 99.113 and reached a 13-year high of 101.140 amid his­tor­i­cal 43-year-low un­em­ploy­ment claims at 235K. Fur­ther­more, the in­dex con­tin­ued the hawk­ish move as Fed Chair Janet Yellen hinted that a rate hike is pos­si­ble as the la­bor mar­ket is reach­ing full ca­pac­ity and post­pon­ing a hike could over-shoot the in­fla­tion tar­get of 2 per­cent. The in­dex closed the week at 101.340.

The Euro opened the week at 1.0847 and con­tin­ued the free-fall fol­low­ing the pre­vi­ous week down­ward move. The cur­rency reached an 11month low of 1.0580 at the end of the week as a strong dol­lar rally con­tin­ued and a slight in­crease of the Euro zone GDP fig­ures were the main themes. The Euro ended the week at 1.0585.

In the UK, the Ster­ling Pound opened the week at 1.2591 and traded in a rel­a­tively tight range com­pared to the other ma­jor cur­ren­cies. Ca­ble re­tracted as in­fla­tion fig­ures came be­low ex­pec­ta­tions by 0.1 per­cent at 0.9 per­cent and the cur­rency ended the week at 1.2343.

In Ja­pan, the Yen also ac­cel­er­ated the free-fall against the green­back reach­ing a 5-month-low of 110.60. The econ­omy in Ja­pan has picked up in the third quar­ter of this year, yet the Dol­lar’s bullish run over­shad­owed the ex­pan­sion. The cur­rency closed at 110.91. On the com­modi­ties side, oil prices fell as a strength­en­ing US dol­lar beat back re­newed hope that OPEC might fi­nally agree on pro­duc­tion cuts. Brent crude oil fu­tures fell 32 cents to $46.17 per bar­rel while West Texas fu­tures were down 47 cents to $44.95 a bar­rel. On the other hand, gold prices fell to a 6-month low of $1,205 on con­tin­u­ing ex­pec­ta­tions of a rate hike in De­cem­ber now stand­ing at 85 per­cent

Man­u­fac­tur­ing ac­tiv­ity

Re­sults from the Oc­to­ber Man­u­fac­tur­ing In­dex suggest that regional man­u­fac­tur­ing con­di­tions con­tin­ued to im­prove. In­dexes for gen­eral ac­tiv­ity, new or­ders, and ship­ments were all pos­i­tive this month. But firms re­ported con­tin­ued weak­ness in over­all la­bor mar­ket con­di­tions. Firms ex­pect con­tin­ued growth for man­u­fac­tur­ing over the next six months and are be­com­ing more op­ti­mistic about em­ploy­ment ex­pan­sion.

The in­dex for cur­rent man­u­fac­tur­ing ac­tiv­ity in the US edged down, from a read­ing of 12.8 in Septem­ber to 9.7 this month. The in­dex has now been pos­i­tive for three con­sec­u­tive months. Other broad in­di­ca­tors showed no­table im­prove­ment. The new or­ders in­dex im­proved markedly this month, in­creas­ing from 1.4 in Septem­ber to 16.3 in Oc­to­ber. The per­cent­age of firms re­port­ing in­creases in new or­ders this month rose to 40 per­cent from 30 per­cent last month. The cur­rent ship­ments in­dex also im­proved, ris­ing 24 points to 15.3. The delivery times, un­filled or­ders, and in­ven­to­ries in­dexes re­mained weak, how­ever, with all reg­is­ter­ing neg­a­tive read­ings, al­though they were less neg­a­tive than in Septem­ber.

Pro­ducer Price in­dex was un­changed for the month of Oc­to­ber fol­low­ing a 0.3 per­cent in­crease in Septem­ber. How­ever, the Core Pro­ducer Price In­dex, which ex­cludes food and en­ergy, fell by 0.2 per­cent in Oc­to­ber. The data might seem mixed, but an over­all look on the US econ­omy would suggest that in­fla­tion has reached a healthy level across many sec­tors.

A Surge in re­tail sales

Sales at US re­tail­ers rose more than forecast last month in a broad ad­vance af­ter an even stronger Septem­ber than ini­tially es­ti­mated, show­ing con­sumers con­tinue to pump up the econ­omy. A 0.8 per­cent rise in Oc­to­ber fol­lowed an up­wardly re­vised 1 per­cent jump in the prior month, mark­ing the biggest back-to­back in­crease since March-April 2014. Healthy hir­ing, wage growth and limited in­fla­tion are giv­ing Amer­i­cans the where­withal to spend at stores, malls and on­line mer­chants. Mo­men­tum at the start of the quar­ter bodes well for house­hold pur­chases, which ac­count for about 70 per­cent of the econ­omy, dur­ing the ap­proach­ing hol­i­dayshop­ping sea­son.

Un­em­ploy­ment claims

Un­em­ploy­ment claims hit a 43year-low this week as the fewest Amer­i­cans since 1973 filed for un­em­ploy­ment ben­e­fits last week at 235K drop­ping by a 19K week to week. This fig­ure sug­gests that the econ­omy is ex­pand­ing at a mod­est level and em­ploy­ers are hir­ing to keep up with de­mand with un­em­ploy­ment claims be­low 300K for 89 straight weeks the long­est streak since 1970 prov­ing healthy la­bor mar­ket.

US new-home con­struc­tion jumped to a nine-year high in Oc­to­ber as an out­sized ad­vance in the num­ber of apart­ment projects ac­com­pa­nied a strong pickup for sin­gle-fam­ily hous­ing. Res­i­den­tial starts surged 25.5 per­cent to a 1.32 mil­lion an­nu­al­ized rate, the fastest since Au­gust 2007. The in­crease from Septem­ber was the biggest since July 1982. Mul­ti­fam­ily-home build­ing was up a whop­ping 68.8 per­cent. The fig­ures in­di­cate the hous­ing mar­ket was mak­ing greater progress a month be­fore a jump in mort­gage rates. While in­creased hir­ing and health­ier fi­nances have been driv­ing de­mand, a sus­tained pickup in bor­row­ing costs threat­ens to dis­cour­age first­time buy­ers and be­come a hur­dle for the in­dus­try.

Draghi op­ti­mistic

Draghi have ex­pressed his op­ti­mism on the mod­est yet steady re­cov­ery of the eu­ro­zone’s econ­omy. He men­tioned the re­cent de­vel­op­ment in the la­bor mar­ket as em­ploy­ment has grown by more than four mil­lion since 2013. Fur­ther­more, the ECB’s pres­i­dent em­pha­sized that the sol­vency of the bank­ing sec­tor is a de­vel­op­ment that pro­vides com­fort to pol­icy mak­ers at the cur­rent mar­ket con­di­tions. Draghi at­tributes the sol­vency of the fi­nan­cial sec­tor to the re-reg­u­la­tion that has led to wel­comed im­prove­ments. Mean­while, as­set qual­ity has also im­proved along with the non-per­form­ing loan (NPL) ra­tio has been de­creas­ing in the euro area, even if mod­estly, he added.

Flash GDP for the eu­ro­zone grew was con­firmed at 0.3 per­cent with Italy at 0.3 per­cent outperforming Ger­many at 0.2 per­cent sug­gest­ing that Ger­man GDP growth could be a lit­tle slower still in com­ing months. Fur­ther­more, Euro area an­nual in­fla­tion was 0.5 per­cent in Oc­to­ber 2016, up from 0.4 per­cent in Septem­ber sig­nal­ing a mod­est growth yet far from the 2 per­cent in­fla­tion tar­get set by the ECB.

“Brexit” ne­go­ti­a­tions

Bank of Eng­land Gov­er­nor Car­ney fo­cused on his term as Gov­er­nor dur­ing the In­fla­tion Re­port Hear­ings. He stated that he would not ex­tend his term fur­ther fol­low­ing the an­nounce­ment of a 1-year ex­ten­sion and that he would leave the bank at the end of June 2019.He also re­it­er­ated that his de­ci­sion to stay un­til 2019 was mo­ti­vated by the de­sire to pro­vide cer­tainty dur­ing the pe­riod of EU exit ne­go­ti­a­tions. Look­ing at mone­tary pol­icy, he re­it­er­ated that, at present, there was for­ward guid­ance in place on the likely stance of mone­tary pol­icy. Car­ney played down the im­pact of the lat­est in­fla­tion data, which was weaker than ex­pected, with com­ments that monthly data is er­ratic.

Ac­cord­ing to Car­ney, in­fla­tion is still likely to in­crease, es­pe­cially as the pro­ducer prices data was stronger than ex­pected for the month. There will be a de­layed pass-through in cost in­creases, but the ef­fect will still be seen over the next few months. Car­ney re­it­er­ated that there was a limit to the tol­er­ance of ac­cept­ing an over-shoot, but there was no spe­cific level of in­fla­tion above the 2.0 per­cent tar­get.

On the data side, un­em­ploy­ment rate in the UK de­creased by .01 per­cent from 4.9 per­cent to 4.8 per­cent in Oc­to­ber in­di­cat­ing a sta­ble la­bor mar­ket in the UK. Yet Claimant Count Change rose from 5.6K to 9.8K in Oc­to­ber show­ing mixed sig­nals on the la­bor mar­ket’s con­di­tion.

The Ja­panese econ­omy grew much faster than ex­pected in the third quar­ter, al­though the un­der­ly­ing trend re­mained weak de­spite ro­bust gov­ern­ment spend­ing and highly ac­com­moda­tive mone­tary pol­icy. Gross do­mes­tic prod­uct ex­panded by 0.3 per­cent to a 6 quar­ter high of 0.5 per­cent.

On the for­eign trade front, BoJ gov­er­nor Kuroda said that the US and Ja­panese economies would both lose huge ben­e­fits if the TPP trade pact were to fail. The aim of the trade pact is to cre­ate one of the world’s great­est free-trade zones. Kuroda added that while fi­nan­cial markets ap­peared to be wel­com­ing the vic­tory of Repub­li­can Don­ald Trump in the US pres­i­den­tial elec­tion, he was closely watch­ing how his eco­nomic poli­cies could af­fect Ja­pan.

Chi­nese pro­duc­tion

In­dus­trial pro­duc­tion, a broad in­di­ca­tor of fac­tory out­put, rose at an an­nu­al­ized 6.1 per­cent in Oc­to­ber from a year ear­lier, the Na­tional Bureau of Sta­tis­tics re­ported Mon­day in Bei­jing. In­dus­trial pro­duc­tion rose by a sim­i­lar amount the pre­vi­ous month in­di­cat­ing a steady growth in the econ­omy. Yet, dis­ap­point­ing re­tail sales growth and fears of US trade fric­tions un­der in­com­ing Pres­i­dent Don­ald Trump are in­creas­ingly cloud­ing the out­look.

Kuwait

Kuwaiti di­nar at 0.30385 The USDKWD opened at 0.30385 yes­ter­day morn­ing.

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