ECB expected to ease further

NBK MONEY MARKETS REPORT

KUWAIT: The US dollar rose last week to its highest level since April amid expectations that the Federal Reserve will increase shortterm interest rates next month. Indeed, the US dollar remained at a six-month peak against the other major currencies, as trading volumes remained thin during the long Thanksgiving weekend.

Last week, a set of upbeat US economic data continued to reinforce the case for a Federal Reserve rate hike next month. The US Department of Labor said jobless claims declined by 12,000 last week to 260,000. Analysts expected claims to fall by 2,000 last week. In parallel, the US Commerce Department said durable goods orders jumped 3.0 percent in October, surpassing expectations for a 1.5 percent increase.

In Europe, markets continue to expect the European Central Bank to increase their monetary stimulus next week. After continuously and clearly signaling their intentions over the past few weeks, backing off from further easing has become extremely difficult without causing a market shock. Since the ECB President Draghi indicated in October that the governing council would act if needed to drive up inflation to its 2 percent target, speculation of further extreme measures continue to weigh on the currency. Economists also revised their forecast for the ECB’s December meeting and now expect a 20 basis point deposit rate cut from previously 10 basis point cut. Additionally, investors expect the ECB to increase the amount of bonds it buys each month to 75 billion Euros from the current 60 billion Euros, or extend its quantitative easing program beyond September 2016 potentially until September 2017.

On the foreign exchange side, the euro fell to its lowest level in more than 7-months on speculations that the ECB will act decisively during its December policy meeting. Markets expect the European Central Bank to either increase the scope of its bond-buying program and/or potentially impose a two-tiered penalty for banks that leave deposits at its facility. At the same time, markets continue to expect the US Federal Reserve to start its monetary tightening cycle. Policy divergence between both continues to create a highly negative environment for the Euro. The currency opened the week at 1.0645, reached a high of 1.0689, however, closed the week at the lowest level since April marking a low of 1.0565.

Similarly the sterling pound opened the week at 1.5186 and rose slightly of 1.5195 where it found major resistance. The currency then dropped sharply, reaching a fresh seven months low of 1.5023, after the Bank of England governor Mark Carney said that UK interest rates are likely to remain low “for some time”. The Pound closed the week near the lows at 1.5040.

The Japanese Yen traded in a tight trading range between a high of 123.25 and a low of 122.23 after minutes from the Bank of Japan meeting indicated that the underlying trend in inflation has been improving steadily and that the quantitative and qualitative monetary easing which the Bank introduced in April 2013 has been exerting its intended effects toward overcoming a deflationary environment.

US Q3 GDP growth revised higher

The US economy grew at a better rate in the third quarter than originally expected, suggesting resilience that could help give the Federal Reserve confidence to raise interest rates next month. GDP grew at a 2.1 percent annually, higher than the 1.5 percent rate reported last month. The growth estimate was also boosted by upward revisions to business spending on equipment and investment in home building. Household consumption, which accounts for almost 70 percent of the economy, grew at a 3 percent annualized rate, less than the previously estimated 3.2 percent.

Personal income also picked up, with salaries rose by 102.7 billion dollars in the third quarter following a 109.4 billion gain in the April through June period. After-tax total personal income adjusted for inflation climbed 3.8 percent in the third quarter from the same time in 2014, the largest year on year gain since the end of 2012. Saving rate was also up to 5.2 percent from 5 percent in the second quarter.

US consumer confidence weak

After dropping in October, consumer confidence index declined further in November. The Index now stands at 90.4, down from 99.1 in October. The decline was mainly due to a less favorable view of the job market. Consumers’ appraisal of current business conditions, on the other hand, was mixed. Consumers’ assessment of current conditions was less positive in November. Those saying business conditions are “good” decreased from 26.8 percent to 24.4 percent. However, those claiming business conditions are “bad” also decreased from 18.3 percent to 16.9 percent. Heading into 2016, consumers are cautious about the labor market and expect little change in business conditions.

US home prices rise

US single-family home prices rose in September at a faster pace than in August and above market expectations. The housing composite index of 20 metropolitan areas gained 5.5 percent in September on a year-over-year basis compared with 5.1 percent in the year to August. The general economy appeared to slow slightly earlier in the fall, but is now showing renewed strength. With unemployment at 5 percent and hints of higher inflation in the CPI, most analysts expect the Federal Reserve to raise its fed funds target range, the first increase since 2006.

French manufacturing PMI drops

The latest flash France PMI data indicated an easing of private sector output growth during November. The Markit Flash France Composite Output Index came at 51.3, down from 51.9 in October. Both manufacturers and service providers signaled weaker increases in activity during November. In each case, growth was modest and the slowest in three months. Some service providers reported that the terrorist attacks in Paris had negatively impacted on activity. New business in the French private sector rose for a third consecutive month in November, with the rate of expansion accelerating to the sharpest in since June.

German PMI and IFO

November data signaled a continuation of private sector output growth in Germany, with the pace of expansion accelerating slightly since October. This was highlighted by the seasonally adjusted Markit Flash Germany Composite Output Index posting 54.9, up from 54.2. Stronger growth was mainly driven by a sharp upturn in activity at service providers, where the rate of increase was the most marked in 14 months.

On a different note, German business confidence unexpectedly rose, in a sign that Europe’s largest economy is strong enough to weather risks including a global slowdown. The Ifo institute’s business climate index climbed to 109 in November from 108.2 in October. The median estimate was for the measure to stay unchanged. It is widely expected that the German data would continue to improve rather than deteriorate ,supported by a stabilization of global growth, lower euro and improving financing conditions on the back of a further easing of the ECB’s monetary-policy stance in December.

Weak UK Q2 GDP

UK’s economy slowed in the three months to September, as trade stood the biggest drag on quarterly growth on record against the backdrop of a slowing global economy. The British economy grew 0.5 percent in the third quarter, the Office for National Statistics said, confirming a preliminary reading, and slowing from 0.7 percent growth between April and June. Foreign trade put the biggest drag on record on British economic growth last quarter, as a weakening global economy and surging demand for imports slowed Britain’s recovery.

Tokyo core yearly CPI improves

There has been a slight improvement in Japan’s inflation numbers, especially in the national CPI for November that reassurance market participants of the slim chances of Bank of Japans Governor Kuroda announcing further QE in the near future. Japan’s CPI ex-fresh food and energy came in at 0.7 percent, which is the only disappointment, while the consumer price index year on year stood at 0.3 percent improving from last year’s 0 percent. Australia’s investment spending drops Australian firms scaled back investment spending by 9.2 percent in the third quarter from the second quarter, a much steeper drop than the 2.9 percent fall economists had been expecting. In the year through September, total new capital expenditure dropped by 20.0 percent. The report also showed that companies expect to invest AUD 120.4 billion in the current fiscal year, which is 20.9 percent lower than the corresponding estimate for the previous fiscal year.