Mar­kets await Fed’s in­ter­est rate de­ci­sion

NBK MONEY MAR­KETS RE­PORT

Kuwait Times - - BUSINESS -

Last week started with the Ital­ian ref­er­en­dum re­sult yield­ing the op­po­site im­pact to what most in­vestors would have ex­pected. The ECB by Thurs­day added to the con­fu­sion by an­nounc­ing a €20 bil­lion re­duc­tion in as­set pur­chases to €60 bil­lion a month from April 2017at the same time ex­tend­ing the pro­gram to De­cem­ber 2017. The mar­ket quickly re­al­ized it was a clever way of keep­ing a dovish tone even if scal­ing back, es­pe­cially as they made it quite clear that they could in­crease it at any point to re­spond to events.

More­over, Draghi’s press con­fer­ence was as dovish that the euro re­mained near the lows of the year. He also said that ECB staff eco­nomic fore­casts for euro area in­fla­tion av­er­ag­ing 1.7 per­cent in 2019 were “not re­ally” close to their man­date of just un­der 2 per­cent.

Si­mul­ta­ne­ously dur­ing the week, three Fed speak­ers, New York Fed Pres­i­dent Wil­liam Dud­ley and his Chicago and St. Louis coun­ter­parts Charles Evans and James Bullard said at sep­a­rate events that they were close to achiev­ing their dual man­date of full em­ploy­ment and 2 per­cent in­fla­tion which in turn leaves lit­tle doubt about the out­come of the next FOMC meet­ing. Dud­ley said that US elec­tion of Donald Trump has cre­ated con­sid­er­able un­cer­tainty over the poli­cies he will pur­sue. Con­se­quently, it was too soon for the Fed­eral Re­serve to judge whether its plan for grad­ual in­ter­est rate hikes needs ad­just­ing.

All eyes turn this com­ing week to the US Fed­eral Re­serve on Wed­nes­day. Fed fu­tures prices showed a 97 per­cent prob­a­bil­ity of an in­ter­est rate hike by the end of this week. More­over, mar­kets are pric­ing in over 50 per­cent chance of an­other hike by June 2017. How­ever the prob­a­bil­ity could change in re­sponse to what poli­cies Donald Trump would push next year once in of­fice.

As men­tioned ear­lier, the po­lit­i­cal risk In Europe con­tin­ues to in­crease with Ital­ians mas­sively re­ject­ing the need of con­sti­tu­tional re­forms. As a re­sult Ital­ian Prime Min­is­ter Mat­teo Renzi re­signed fol­low­ing the de­feat. The re­jec­tion of the peo­ple could po­ten­tially threaten the coun­try’s un­sta­ble bank­ing sys­tem. The “No” vote had over­whelm­ing won the ref­er­en­dum with nearly 60 per­cent of Ital­ian vot­ers re­ject­ing Renzi’s con­sti­tu­tional re­forms. It is now up to the Ital­ian Pres­i­dent to de­cide the next move. He could piece to­gether a govern­ment out of the cur­rent Par­lia­ment or call for a gen­eral elec­tion. The pop­ulist Five Star Move­ment had de­manded a snap elec­tion, which polls in­di­cate it would win, and con­tinue to pledge to hold a ref­er­en­dum on Italy’s EU mem­ber­ship.

More­over, fi­nan­cial mar­kets have seen the out­come of the ref­er­en­dum as a big neg­a­tive threat for the Euro­pean Union caus­ing more un­cer­tainty to the coun­try’s bank­ing in­dus­try. In­deed, the first victim was re­vealed this week be­ing Italy’s old­est bank mov­ing in a down­ward spi­ral af­ter the ECB has re­jected its re­quest for more time to raise cap­i­tal.

Fol­low­ing Bri­tain’s vote to leave the Euro­pean Union in June and Donald Trump’s vic­tory in last month’s US pres­i­den­tial elec­tion and now Italy re­ject­ing po­lit­i­cal and eco­nomic re­forms, the global po­lit­i­cal arena con­tin­ues to be ex­tremely sen­si­tive in a time where the Fed­eral Re­serve pre­pares it­self to raise in­ter­est rates next week.

On the cur­rency front, the euro ini­tially rose fol­low­ing the Euro­pean Cen­tral Bank press re­lease, as in­vestors thought that the ECB was re­duc­ing its quan­ti­ta­tive eas­ing pro­gram. How­ever, mar­kets quickly re­al­ized that the net re­sult of the bank’s de­ci­sions was neg­a­tive for the cur­rency, since ex­tend­ing the eas­ing pro­gram to De­cem­ber is more than the six month ex­ten­sion that mar­kets ex­pected. This quickly forced the Euro down against its ma­jor coun­ter­parts. Its need­less to say that the Union state will be closely linked to a chain of po­lit­i­cal events in Europe in 2017. Elec­tions in Nether­lands, Ger­many, and France might open up the chance for the pop­ulist sen­ti­ment that is tak­ing a hold of Europe to have a stronger foothold in the po­lit­i­cal scene.

The Euro cur­rency opened the week at 1.0672against the US Dol­lar and man­aged to reach a short lived high at 1.0872. The pair-closed the week near the lows of 1.0565.

The Ster­ling Pound opened the week at 1.2725 and reached a low of 1.2545 against USD. How­ever, the Pound re­cov­ered as hopes that the UK Govern­ment might seek a soft “Brexit” whereby the UK pays to re­main in the sin­gle mar­ket once it has left the Euro­pean Union. The cur­rency man­aged to close the week at 1.2578.

In Asia, the USDJPY man­aged to reach a high of 115.44on spec­u­la­tion the Ja­panese econ­omy would face pres­sure from US Pres­i­dent-elect Donald Trump’s plan to with­draw the US from any multi­na­tional trade deal and on po­ten­tial im­ple­men­ta­tion of pro­tec­tion­ist poli­cies. Al­though ex­pec­ta­tions Trump will in­crease fis­cal spend­ing and set US growth on a higher gear were seen as a ben­e­fit to Ja­pan, con­cerns around trade pol­icy un­der the in­com­ing ad­min­is­tra­tion high­lighted the world third largest econ­omy’s de­pen­dence on ex­ports. The pair closed the week at 115.40.

US man­u­fac­tur­ing

The US ISM non-man­u­fac­tur­ing index climbed more than ex­pected in Novem­ber from 54.8 to 57.2. The in­crease was driven by busi­ness ac­tiv­ity, em­ploy­ment and de­liv­er­ies. This is the high­est level in 13 months. Over­all, ISM non-man­u­fac­tur­ing sur­vey brought a pos­i­tive sur­prise and sug­gests that the ser­vices sec­tor is grow­ing at a com­fort­able pace. Taken to­gether with the ISM man­u­fac­tur­ing sur­vey re­leased last week, which was also bet­ter than ex­pected, the com­pos­ite level of ISM man­u­fac­tur­ing and non-man­u­fac­tur­ing is con­sis­tent with GDP growth be­ing above 2 per­cent yearover-year.

US trade deficit

The US trade deficit recorded its big­gest ex­pand in more than one and a half years in Oc­to­ber as ex­ports of soy­beans and other prod­ucts fell, sug­gest­ing trade would be a drag on growth in the fourth quar­ter. Trade deficit ex­panded to $42.6 bil­lion in Oc­to­ber from $36.2 bil­lion in pre­vi­ous month. Higher im­ports due to ris­ing do­mes­tic de­mand also con­trib­uted to the widen­ing of the deficit. When ad­justed for in­fla­tion, the deficit rose to $60.3 bil­lion from $54.2 bil­lion in Septem­ber.

The num­ber of job open­ings was lit­tle changed at 5.5 mil­lion on the last busi­ness day of Oc­to­ber, dropped from 5.6 mil­lion in pre­vi­ous month. The job open­ings rate was 3.7 per­cent in Oc­to­ber. How­ever, the un­em­ploy­ment claims came at 258,000, a de­crease of 10,000 from the pre­vi­ous week’s un­re­vised level of 268,000. The 4-week mov­ing av­er­age was 252,500, an in­crease of 1,000 from the pre­vi­ous week’s un­re­vised av­er­age of 251,500. This marks 92 con­sec­u­tive weeks of ini­tial claims be­low 300,000, the long­est streak since 1970.

Europe & UK

The Euro­pean Cen­tral Bank said in a press re­lease that its Gov­ern­ing Coun­cil de­cided to keep its in­ter­est rates un­changed, in line with ex­pec­ta­tions. The coun­cil also de­cided to main­tain its as­set pur­chase pro­gram at the cur­rent monthly pace of €80 bil­lion un­til the end of March 2017. How­ever, the pro­gram will be re­duced to €60 bil­lion start­ing from April 2017, and its run­ning pe­riod will be ex­tended to De­cem­ber 2017. The press re­lease did not rule out the pos­si­bil­ity of length­en­ing the pro­gram’s pe­riod fur­ther. The ex­ten­sion would add a to­tal of 540 bil­lion Eu­ros to its cur­rent 1.7 bil­lioneuro stim­u­lus, mak­ing the size of the pro­gram dou­ble what the ECB ini­tially an­nounced it in Jan­uary 2015. By ex­tend­ing bond pur­chases but re­duc­ing the monthly pace, the ECB may be try­ing to pre­serve its ex­tra­or­di­nary mon­e­tary stim­u­lus as po­lit­i­cal risks cloud the out­look for the euro area’s re­cov­ery.

Europe PMI

The rate of eu­ro­zone eco­nomic ex­pan­sion ac­cel­er­ated to its high­est in the year to date dur­ing Novem­ber. Al­though still well in ex­pan­sion­ary cat­e­gory, the eu­ro­zone ser­vices and com­pos­ite PMI re­flected mar­ginal soft­en­ing. Eu­ro­zone Ser­vices PMI dropped slightly to 53.8 from 54.1 in Oc­to­ber. The fig­ure came marginally weaker than mar­ket ex­pec­ta­tions.

On other hand, Ger­man ser­vice providers en­joyed a fur­ther month of solid out­put growth, with the lat­est in­crease the most marked in six months. In­creased ac­tiv­ity was driven by new busi­ness wins which con­tin­ued to ex­pand strongly. With busi­ness out­stand­ing ris­ing for the first time since June, com­pa­nies were en­cour­aged to raise their work­force num­bers fur­ther dur­ing the month. Ger­many Ser­vices PMI Busi­ness Ac­tiv­ity rose from Oc­to­ber’s 54.2 to a six-month high of 55.1 in Novem­ber and thereby sig­naled stronger growth of busi­ness ac­tiv­ity.

Ger­many fac­tory or­ders

Ger­many fac­tory or­ders grew at the fastest pace in more than two years in Oc­to­ber, in­di­cat­ing strong eco­nomic ac­tiv­ity at the end of this year. In de­tails, fac­tory or­ders grew 4.9 per­cent month to month in Oc­to­ber, re­vers­ing a 0.3 per­cent drop in Septem­ber. In con­clu­sion, man­u­fac­tur­ing has gained mo­men­tum in au­tumn, which sug­gests that in the fourth quar­ter Ger­man econ­omy is grow­ing at a con­sid­er­ably quicker pace than in the pre­vi­ous quar­ters.

UK ser­vices

UK ser­vices sec­tor ac­tiv­ity showed an un­ex­pected im­prove­ment and sur­prised mar­kets to the up­side in the month of Novem­ber. The ser­vices PMI ac­cel­er­ated its pace of ex­pan­sion to 55.2 in Novem­ber from 54.5 in pre­vi­ous month. The re­bound marked the high­est lev­els in ten-months, high­light­ing the un­der­ly­ing strength of the econ­omy at a time of huge po­lit­i­cal un­cer­tainty. Cer­tainly the econ­omy has held up much bet­ter than ex­pected in the wake of the Brexit ref­er­en­dum out­come. The UK data con­tinue to sur­prise to the up­side, and this ser­vices PMI read­ing is no ex­cep­tion, point­ing to an­other good quar­ter and strong end to the year for the all-im­por­tant ser­vice sec­tor. This can be at­trib­uted in part to the fact that the UK is yet to trig­ger Ar­ti­cle 50, mean­ing that noth­ing has changed yet, while the fall in ster­ling has height­ened the UK’s in­ter­na­tional com­pet­i­tive­ness.

On a dif­fer­ent front, UK man­u­fac­tur­ing pro­duc­tion fell by 0.9 per­cent on the month to Oc­to­ber 2016, fol­low­ing an in­crease of 0.6 per­cent in the ear­lier month. The drops were broad-based across the sec­tor, with the largest down­ward pres­sure com­ing from phar­ma­ceu­ti­cals, which fell by 3.6 per­cent. Man­u­fac­tur­ing month on same month a year ago de­creased by 0.4 per­cent in Oc­to­ber 2016. The largest down­ward con­tri­bu­tion came from phar­ma­ceu­ti­cals, which fell by 9.4 per­cent. There were some in­creases par­tially off­set­ting the de­creases, with the largest up­ward con­tri­bu­tion com­ing from other man­u­fac­tur­ing, in­creas­ing by 10.4 per­cent.

RBA keeps rate un­changed

The Re­serve Bank of Aus­tralia de­cided to leave the cash rate un­changed at 1.5 per­cent, not­ing that “tak­ing ac­count of the avail­able in­for­ma­tion, and hav­ing eased mon­e­tary pol­icy ear­lier in the year, the Board judged that hold­ing the stance of pol­icy un­changed at this meet­ing would be con­sis­tent with sus­tain­able growth in the econ­omy and achiev­ing the in­fla­tion tar­get over time.” The RBA noted that, com­mod­ity prices have risen over the course of this year, re­flect­ing both stronger de­mand and cut backs in sup­ply in some coun­tries. The higher com­mod­ity prices have sup­ported a rise in Aus­tralia’s terms of trade, al­though they re­main much lower than they have been in re­cent years. The higher prices are pro­vid­ing a boost to na­tional in­come.

Chi­nese con­sumer price index in­creased by 2.3 per­cent year over year in Novem­ber, slightly above the mar­ket ex­pec­ta­tions of 2.2 per­cent and the fastest pace since April. Food prices climbed 4 per­cent year over year and non-food prices 1.8 per­cent. The Pro­ducer Price Index climbed by 3.3 per­cent y/y, the high­est since Oc­to­ber 2011, thanks to high com­modi­ties prices. The con­sen­sus es­ti­mate was for an in­crease of 2.2 per­cent. Pro­ducer price de­fla­tion has been abat­ing all year as the econ­omy con­tin­ued to ab­sorb spare ca­pac­ity. Pro­ducer prices first turned marginally pos­i­tive in Septem­ber and have re­mained on the right side of growth ever since.

Ja­panese GDP dropped

Gross do­mes­tic prod­uct came at 0.3 per­cent in the Septem­ber quar­ter of this year, just half of the 0.6 per­cent growth rate ex­pected by mar­ket. The GDP De­fla­tor fell 0.2 per­cent, also two times worse than fore­casts, which had promised a drop by just 0.1 per­cent. As for pos­i­tive news, the sea­son­ally ad­justed cur­rent ac­count widened from ¥1.48 tril­lion to ¥1.93 tril­lion in Oc­to­ber, ex­ceed­ing the me­dian forecast.

Kuwait

Kuwaiti di­nar at 0.30540 The USDKWD opened at 0.30540 yes­ter­day morn­ing.

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