An explosive bullish run for the US dollar
NBK MONEY MARKETS REPORT
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
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 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 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.
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.
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.
Kuwaiti dinar at 0.30385 The USDKWD opened at 0.30385 yesterday morning.