Market Views For 2016 - page 16
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Yellen: Labor market-inflation relationship seems weaker
Yellen in Boston
She's speaking more in a theoretical tone here but it underscores her dovish leanings. You could extrapolate it to mean that she will wait longer but I think that's going to far. In her view, a hike in December is still very accommodative.
Beyond that it might get tricky. She could be starting to signal that only one or two hikes in 2017 is the baseline. On that angle, I think there is a case for USD selling here and better levels for stocks.
Pound to Dollar Rate Forecast to End 2016 Higher than Current Levels say Lloyds Commercial Banking Who Revise Down Their Forecasts
The British Pound is seen higher against the Dollar as analysts say the "risk-premia of holding Sterling has risen too far".
GBP was the second-worst-performing currency in the G10 space for the week ending 14th October.
"The Swedish Krona is the weakest of the G10 currencies this week - knocking the pound off its dismal perch for once," notes Kit Juckes at Societe Generale in a brief to clients, "GBP's fall may be eclipsed by the SEK move, but the pound has fallen by twice as much as any other major currency over the last month."
Sterling's weakness has caught some in the research community by surprise with forecasters at Lloyds Bank announcing this week they have downgraded their expectations for the Pound as a result.
Lloyds see a rate cut by the Bank of England in November as possible although far from a done deal, they expect the Federal Reserve to raise US interest rates in December with more confidence.
The resulting widening differential between UK base lending rates at 0.1% - supposing a BOE cut in November - and 0.75% for the US - supposing a rise in December - would likely cause a decline in the GBP/USD.
This occurs as investor flows seek higher-yielding US assets over UK assets.
However, Lloyds do not see new lows as being achieved by the pair even in the event of widening interest rate divergence
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Fed Still On Course for December Hike, No Red Flags Demanding November Action
Although insisting its political independence, the Fed will need a very convincing argument to raise rates next month. Only extremely strong CPI data would deflect the Fed from a pass in November.
The latest US employment data was broadly in line with expectations with the increase in payrolls of 156,000 for the month after an upwardly-revised 167,000 gain for August, while unemployment edged higher to 5.0% from 4.9%. The 0.2% increase in average earnings was in line with expectations with the annual increase at 2.6% from 2.4%.
The headline September retail sales data was in line with expectations with a 0.6% gain, while a slight beat on the underlying data was offset by a disappointing reading for the control group.
The data maintains expectations of a solid economy and very robust labour market, especially with jobless claims close to 40-year lows. The data maintains a very solid case for increasing interest rates but, crucially, there was no significant evidence in the Fed’s eyes for a more urgent need to tighten policy.
In a speech on Friday, Fed Chair Yellen concentrated on longer-term issues surrounding the economy and the potential need for aggressive policy actions to combat future downturns.
Crucially, there was no commentary on the current economic outlook or monetary policy situation. This omission remains a very important signal that the Fed is not looking to push the market towards a November hike.
Philadelphia Fed President Harker commented on Friday that he would have supported the case for a rate increase at the September meeting and also wanted to increase interest rates relatively soon. He also remarked, however, that it might be prudent to wait until political uncertainty had eased.
Although Fed officials take every opportunity to assert their independence from the political process, there is an important element of protesting too much and the decision-making certainly cannot be distanced entirely from the political process.
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Fed Fischer’s Frustration: Low Rates Making Fed Policy More Difficult
In a speech on Monday Federal Reserve Vice-Chair Fischer examined the causes of low interest rates, a subject which has been a key element in many speeches by global central bankers over the past few months. Although the Fed would like higher rates, underlying forces are making this very difficult to achieve.
He stated that there are powerful reasons to prefer rates to be higher than they are at the present given the dangers in holding rates at very low levels for an extended period.
Firstly, low rates are a symptom of low underlying growth and productivity in the economy, which tends to undermine prosperity growth.
Low interest rates also make it much more difficult for central banks to respond to any shocks to the economy, as there is little room to cut rates when they are already close to the effective lower bound.
Thirdly, there is a risk that low interest rates will pose a threat to financial stability. Fischer stated that there was no evidence so far of a heightened threat to financial stability in the US from low interest rates, although he also stated that the dangers of excessive leverage and financial instability were clearly on the minds of some Federal Reserve members.
Fischer stated, however, that it was difficult for the Fed to raise rates given a decline in the underlying equilibrium rates of interest rates for the economy, low productivity, weak investment and demographic changes.
Fischer stated that the 1.7% core PCE inflation reading is close to the Fed’s target and that he would be very reluctant to raise the inflation target. He also commented that the Fed is very close to its inflation and employment targets.
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British Pound To US Dollar Rate Forecast: 1.25 By End 2016 Say Lloyds Bank Analysts
Foreign currency exchange (FX) analysts at Lloyds forecast a GBP/USD value of 1.25 by the end of 2016. We examine the pound to dollar conversion in more detail.
Lloyds have released their pound sterling to dollar exchange rate outlook for October 2016. Here are the key takeaways:
For the next few months, the news on the political front will decide the direction of the pound sterling. Positive economic data will be disregarded, however, any negative news on the data will add to the bearishness on the pound.
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EU believes free trade deal with U.S. unlikely: source
The European Commission believes it is unlikely that negotiations with the United States over a free trade deal will be successful, a Commission source told Reuters on the condition of anonymity on Wednesday.
It wants to preserve the interim status reached in negotiations between the European Union and the U.S. on the Transatlantic Trade and Investment Partnership (TTIP), the source added.
This would allow the Commission to continue negotiating with the next U.S. administration after President Barack Obama's term expires in January.
The source said there has been some progress on some issues, which the Commission wants to preserve, instead of starting from scratch with a new U.S. administration.
The U.S ambassador to Germany, John B. Emerson, told a German broadcaster on Tuesday that the two sides were close to bridging differences on many sticking points and that Obama would make a final push for a deal after the U.S. election on Nov. 8.
Fed’s Beige Book: Labor Market Remained Tight
In the latest Federal Reserve Summary of Commentary on Current Economic Conditions (Beige Book), there was evidence of further labor-market tightening.
Most Districts reported a modest or moderate pace of expansion. Although New York reported no overall change in activity, 3 districts, including Kansas City, reported that the pace of growth had improved.
Manufacturing activity was mixed, while most Districts saw an uptick in retail spending, with the overall outlook for modest growth over the months ahead. There were signs of stabilisation in the oil and gas sector.
Residential construction and real estate activity continued to expand, although low home inventories continued to restrain sales in a few Districts.
Employment expanded at a modest pace over the reporting period with some layoffs in the manufacturing sector.
Overall labor market conditions remained tight across most Districts and, while reports of labor shortages varied across skill levels and industries, there were multiple mentions of difficulty in hiring workers across many sectors. There were also specific reports that shortages of construction workers were constraining economic activity as supply-side issues increase.
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Oct ECB: 5 Scenarios: How Will EUR React?
Market expectations for an immediate policy change by the ECB are muted as we approach the meeting this week. Recent euro area economic data show the resilience of the economy, and a rate cut looks unlikely for now. Expectations of a rate cut into the meeting this week are fairly muted in the rates market.
The October meeting can be still important for the FX market, as markets are waiting for clarification on the future of the QE programme. We do not expect the ECB to make any final decisions on the QE programme this week, but any suggestions as to the likely path of the QE at the press conference could influence the euro area yield curve. FX market interest in the possibility of further bond sell-offs is rising, and the ECB’s policy stance can influence the broader FX market, not only EUR.
Five possibilities: This week the ECB may communicate: 1) no details as to the future path of QE, 2) indications about extending QE further, or 3) indications of approaching tapering.
Then, if the ECB is inclined to extend the QE further, we see three likely options for the Bank to enable the extension: 2a)departure from the capital key, 2b) removal of the deposit rate floor, and 2c) increase in ISIN/issuer limits.
Conclusion: We believe the ECB’s next step will be to extend its QE programme, not to taper it, and stronger indications of a QE extension would keep EUR/USD depreciating at its current pace.
Curve steepening is possible, but steepening owing to a QE extension would probably not cause a negative reaction in risk sentiment, which would enable USD/JPY to maintain its recent appreciation trend too. If ECB communication further increases market concerns about near-term tapering, the curve could steepen and risk sentiment deteriorate. This would challenge the recent trend of EUR/USD depreciation and USD/JPY appreciation. It is possible that the ECB does not offer any further details as to the future of QE, which would lead to muted reactions in the FX market. Under that scenario, comments by ECB officials and possible media leaks regarding the future of the QE programme, beyond the meeting next week, could increase EUR volatility into the December meeting.
As we expect the ECB to choose to extend the QE programme in the end, we judge EUR/USD downside risk is higher into the December ECB/Fed meetings.
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EUR/USD: A 'Head & Shoulders' Top & 9 Other Reasons To Stay Short
The pattern on the daily chart of EURUSD clearly looks like a head and shoulders top.
The neckline of this pattern at 1.1010 has given way on a daily close basis providing a target of a move towards 1.03 (New lows in the downtrend from the 2008 highs above 1.6000.
Interim support ahead of there is met at 1.0822-1.0826.
>>>There are a number of factors (Technical and non-technical) which we believe support this move lower in EURUSD (and the EURO overall)1– Europe is at a different point in the economic/rate cycle. While the ECB may be concerned about the efficacy of ZERO /Negative rates it is unlikely they will raise short-term rates anytime soon. At the same time the FED looks ready to resume the tightening cycle as early as December.
2– Inflation expectations in the US are more elevated than in Europe
3– From an investor perspective Europe provides very low yields with higher risk (periphery) and low to negative nominal yields at the core (Germany). Real yields are negative in Germany on almost all parts of the curve and barely positive out at the 30 year maturity. Even then nominal 30 year German yields are 65 basis points compared to 2.52% in the US. Overall the yield spread continues to move in favour of the US (See chart below)
4– Monetary conditions in Europe remain tight.
5– Fiscal policy adjustment looks increasingly likely to some degree in the US while the bar remains much higher in Europe (particularly in those nations that are economically troubled).
6– Brexit 2 (Brexit 1 was the ERM exit in September 1992) creates uncertainty for Europe as well as the UK.
7– Concerns about capitalization of European banks.
8– Italian referendum (December 4th).
9– Political turmoil/ immigration challenges etc.
Citi maintains a short EUR/USD position* in its technical portfolio.ECB's Nowotny: Expect Eurozone inflation of 0.2% for 2016, over 1% for 2017
Comments from Nowotny