Optimism on US tax reforms pushes dollar higher

The Fed’s Chairwoman Janet Yellen portrayed an optimistic outlook on the US economy and for price growth in the months to come, suggesting the footprint of the recent hurricanes will likely moderate economic growth temporarily and should be followed by a rebound by year end. She restated that the persistence of undesirably low inflation this year has been a surprise. Although, she expects inflation to begin its northern momentum as the effects of temporary factors such as falling prices for consumer cellphone services begin to fade. As for market expectations, markets are skeptical on Yellen’s outlook for future interest rates as FED members are not on the same page. The Fed fund futures show only a 70% chance of one rate hike in 2018, while the FED’s dot plot indicate 3 rate hikes.

Reports from all twelve FED districts noted that the pace of growth expanded between modest to moderate across the US in September and October despite the inflow of hurricanes that caused major disruptions in some areas and sectors. Still, the economy seemed to have weathered down the storms better than anticipated. As always, one major theme continues to disappoint, “wage growth”. Several districts reported difficulty in finding qualified workers across many sectors. Even the tightest labor market in years did little to heat up inflation. The Fed described the increase in wages and the cost of materials as modest. The main theme is that the Central Bank is on the road to hike a third time this year in December and the recent hurricanes were just a slight depressor for an economy now in its ninth year of growth making it one of the longest expansions ever.

Trumpflation may reemerge after the Senate accepted a budget plan that would allow them to advance with the tax remodel without the backing of Democrats. Despite having control of the government, Republicans have been unable to create a legislative achievement, setting further pressure on officials to succeed in passing a tax bill. As for Europe, politics continues to dictate market trajectory as the standoff between Spain’s central government and Catalonia escalates. The Spanish government has enough backing to disband Catalonia’s parliament and hold new elections in January to try to resolve the regional government’s push for independence.

On the currency front, the dollar index began the week on a strong footing after slightly hawkish remarks from the FED’s Chairwoman, positive data on the US economy and a report that indicated President Donald Trump favored a hawk to head the Federal Reserve. On Wednesday, the dollar index lost ground after the housing report came in frail. However, the downward momentum was short lived due to renewed hopes for a major tax reform after the Senate approved a budget blueprint for 2018. The index began the week at 93.156 and closed on Friday at 93.701.

The euro extended its losses on Monday as the unclear political environment around the EU continues to diminish sentiment. The EUR/USD recovered all its losses it incurred at the start of the week and entered into positive territory on Wednesday as politics faded from the headlines, while taking advantage from the dollar’s pull back. The EUR/USD closed its weekly session at 1.1783 down by 0.20 percent for the week. The pound sterling was under pressure the entire week on both fronts, politically and economically. After the release of the inflation and labor report, the GBP/USD persisted downhill. The GBP/USD lost 0.69 percent of its value last week.

Safe haven currencies like the Japanese Yen and Swiss Franc remained the weakest currencies for the week on resilient global risk appetite and a stronger US dollar. The yen and Swiss Franc lost 1.41 percent and 0.90 percent respectively versus the greenback this week.

In the commodities complex, oil prices surged on Monday through Wednesday as reports of clashes between Iraqi troops and Kurdish armed forces near Kirkuk sent WTI and Brent higher. Meanwhile, government data showed a largerthan-expected drop in US crude inventories. Brent crude was last trading near the $57 level.

Manufacturing

The New York Fed reported that the general manufacturing conditions in the state of New York soared to a three-year high of 30.2 in October, up by 5.8 points from the preceding month and topped market expectations for a reading of 20. The index was enhanced despite some of the key components actually worsened, like new orders, which fell to 18 from 24.9 and the average work week index came in at zero. On the positive front, the shipments index rose 11 points to 27.5 the highest level since October 2009 and the employment index showed the sturdiest reading since March 2015, while the change in hours worked remained constant.

Looking at the six-month outlook, firms remained optimistic about future conditions with the index for future business conditions rising by six points to 44.8 and the employment is expected to increase modestly. The dollar’s recent depreciations is part of the story, but domestic demand played a roll too. The overall message from this and other surveys is that the industrial sector remains resilient.

Moving on to the Philadelphia region, the manufacturing state improved to a five months high for the current month. The Philly FED claimed the index was elevated by 4.1 points to 27.9. The sub-component that trails the number of employees soared to an all-time high of 30.6 from 6.6 seen last month and expectations for hiring over the next six months burst to the highest level in 33 years. Growth in the industry isn’t just stable, it’s accelerating, and businesses surveyed by the local bank remained bright on the future outlook.

Import prices

The price for foreign goods shipped to the US peaked to the highest level in 15 months, suggesting inflation could pick up in the near term following months of sluggish readings. The rise is attributed to rising petroleum and food costs for the month of September. Last month, prices for imported petroleum increased 4.5 percent after rising 5.0 percent in August. Food prices surged 1.8 percent, the largest gain since July 2016. The cost of imported goods rose 0.7 percent m/m, while core prices gained 0.3 percent m/m. Over the past 12 months the import price index has risen 2.7 percent. The data should further reinforce the FED’s case for one last rate hike before the year ends. Inflation has been one of the most closely watched measures this year since price growth has broadly remained cool despite strength in the labor market.

Hurricanes impact

Recent Hurricanes in the US subdued the housing market, especially in the southern states last month, while a decline in building permits raised fears that the housing market recovery is stalling. The Commerce Department said housing starts dove 4.7 percent m/m, the lowest since September 2016 and building permits fell 4.5 percent m/m. The problem is that even before the storms struck, residential construction had almost deteriorated this year due to lack of land and skilled laborers as well as rising costs for building materials. The latest figures from the housing market may introduce a downward pressure on the third quarter of this year.

Kuwait

Kuwaiti dinar at 0.30220

The USDKWD opened at 0.30220 yesterday morning.