Market Views For 2016 - page 18
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Nonfarm Payrolls Give Federal Reserve Green Light for December Rate Hike
The Federal Reserve has received the final green light it needs to continue raising interest rates in December.
On Wednesday, the central bank’s official statement said it was waiting for “some further evidence of continued progress toward its objectives” of price stability and full employment. That evidence would come two days later when the Labor Department released another batch of solid employment numbers that also pointed to stronger wage inflation.
The US economy added 161,000 nonfarm jobs last month. The reading was smaller than expected, but followed an upwardly revised gain of 191,000 in September that was originally reported as 156,000. That brought the three-month average to 176,000. For 2016 as a whole, the economy has added an average of 181,000 monthly jobs.
Average hourly earnings, a gauge of inflationary pressure, rose 2.8% year-over-year. The jobless rate also nudged down to 4.9% from 5%.
“The labour market has, by and large, had a pretty good year,” Federal Reserve Vice Chair Stanley Fischer said Friday in prepared remarks at a conference for the International Monetary Fund (IMF). The Fed official said the economy is “close to full employment.”
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Portugal’s Slow Economic Growth Underscores Eurozone Instability
Portugal’s slow recovery over the past two years is raising fresh worries that the southern European economy may require another hefty bailout package to stave off a debt relapse.
Portugal and its southern European neighbours Italy, Spain, Greece and Cyprus were at the heart of the last European financial crisis. In response, the European Union (EU) implemented a series of support mechanisms, including providing emergency loans to countries most affected by surging interest rates. The European Central Bank (ECB) also lowered interest rates and went as far as buying government bonds and private debt to spur recovery across the battered region.
However, southern Europe is once again at the centre of a new financial crisis involving nonperforming loans. Portugal, Spain and Italy collectively have over €540 billion in nonperforming debt. Italy alone accounts for roughly one-third of the Eurozone’s total amount.
Portugal is facing a worsening investment climate, as weak economic growth has failed to impress confidence both internally and across the region. Portugal’s debt is fast approaching 130% of its gross domestic product (GDP). The International Monetary Fund (IMF) has already warned Lisbon that its capacity for repaying debt is decreasing, leaving Portugal “uniquely vulnerable to shifts in market sentiment.”
Portuguese bond yields have risen sharply this year, reflecting prevailing concerns about Lisbon’s credit rating. Slow economic growth is making it difficult for the government to stick to Brussels’ fiscal rules. A relapse in Portugal could decimate the European Union at a time when its morale is at an all-time low. With the United Kingdom fully intending to leave the bloc, a major referendum in Italy next month could determine whether southern Europe’s largest economy follows suit. A collapse in Portugal would be difficult to recover from.
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BlackRock says Australia could lose AAA rating next month
Weekend news from Bloomberg, an opinion from BlackRock
The ECB are weighing possible steps to extend QE
According to the Bank of Italy deputy governor
Comment coming from Berkeley Captial via twitter.
Probably not news that's hardly unexpected.
More now coming from the Bank of Italy via Reuters;
JPMorgan says Yellen to serve full term as Chair regardless of who wins election
JPMorgan economist Michael Feroli in a client note Monday
Fed's Williams: Fed can start gradually removing easy policy over next few years
John Williams, president of the Federal Reserve Bank of San Francisco
- Nowhere in the Fed's regular policy discussions is any discussion of politics
- Says US economy is close to goal of maximum employment
- Says expects inflation to move back to 2% in next year or two
- Fed can start gradually removing easy monetary policy over next few years
Headlines via BloombergReuters poll: 15 of 25 economists see BOJ on hold to mid-2017
The latest poll Reuters have conducted on BOJ expectations
USD: Can Trump Revive The Divergence Trade?
The USD seems supported by the growing market perception that Trump’s policies may re-invigorate the policy divergence trade on a more sustained basis.
Indeed, aggressive fiscal stimulus could boost domestic growth, encourage further Fed tightening and push real UST yields higher in the coming quarters. A return of the US protectionists’ policies could depress growth and yields abroad, and encourage capital inflows into the US, supporting USD. This can explain the growing correlation between USD, UST yields and the re-steepening UST yield curve in the wake of the presidential election (Figure 2).
As investors navigate significant policy uncertainty, the fact that Republicans now control the Presidency, the Senate and the House suggests more scope for domestic economic policy activism. Although Congress is still likely to restrain President Trump’s spending ambitions given the conservative fiscal stance of House Speaker Paul Ryan, some fiscal stimulus now appears likely for 2017. Add the potential for a reduction in the corporate tax rate, foreign retained earnings repatriation and immigration restrictions, and markets are likely to be pricing in higher growth and inflation in the US, which is positive for longer-term yields.
The contours of President Trump’s team should start emerging in the coming weeks as markets will be looking for some reassurance on many fronts, including domestic economic policy, foreign affairs, immigration and trade. So far the list of potential candidates has been relatively short: Steven Mnuchin, who took an active role in on the fundraising side of Trump’s campaign, has been suggested as a potential Treasury Secretary, while old guard republicans Rudy Giuliani and Newt Gingrich could also be rewarded for their support. Overall we suspect this will be a combination of pro-business and core Republican figures, with the latter helping Trump repair ties with the Republican establishment. Despite his persistent criticism of Fed Chair Yellen she is likely to stay on until her term expires in February 2018, at which point President Trump is likely to nominate a different candidate. Any toning down of rhetoric towards the Federal Reserve and the overall business-friendly contours of the future Administration could help ease, but they are unlikely to completely eliminate, the uncertainty about future policy.
After an initial dip, December Fed tightening expectations are back at 75% and our US economists maintain their call for a 25bp hike in the Fed funds rate next month. Recent US data has been comfortably clearing the Fed’s bar, so it would take a significant rise in market volatility and tightening financial conditions to preclude a tightening move. Far reaching proposals on fiscal policy and trade will have clear implications for the Fed stance in 2017 but to the extent that they won’t be legislated until the second half of next year, the FOMC has little to go on to alter its current outlook. The Fed is looking to tighten by only 15bp priced in by the market, which suggests scope for the front-end of the US yield curve to steepen as well.
While we expect USD to extend its gains going into the December Fed meeting, we remain conscious of the risk that higher real UST yields and FX appreciation could trigger uncomfortable tightening of the US financial conditions (Figure 3) and mute the aggressiveness of any Fed rate hikes from here. This could be reflected in somewhat more cautious forward guidance that could limit the scope for USD outperformance across the board.
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Euro To Dollar Exchange Rate @ 1.08, US Dollar To Yen @ 108 For 2016-2017 Forecast
BNP Paribas believes that their year-end targets of 1.08 in the EUR/USD and 108 in the USD/JPY will arrive much earlier. They believe the USD to gain strength, as the US two-year yields rise to six-month highs, amid 80% probability of a December rate hike by the US Federal Reserve
The shock victory of Donald Trump jolted the markets only for a short while, as the markets quickly sought to focus on his policies of increased fiscal stimulus and a stronger growth rate for the US economy.
The market expects these actions to increase inflation at a much faster rate than the current forecast.
The US Fed will have to hike rates in response to the higher inflation numbers, which is likely to support the US dollar.
BNP Paribas expects the “preliminary Michigan sentiment data for November to show some negative impact from uncertainty over the election period. However, subsequent equity market recovery suggests this may be short-lived.”
Latest Euro / Dollar Exchange Rates
On Saturday the US Dollar to Euro exchange rate (USD/EUR) converts at 0.921
At time of writing the euro to us dollar exchange rate is quoted at 1.086.
The euro conversion rate (against pound) is quoted at 0.862 GBP/EUR.
FX markets see the euro vs swiss franc exchange rate converting at 1.072.
Today finds the euro to japanese yen spot exchange rate priced at 115.787.
Please note: the FX rates above, updated 12th Nov 2016, will have a commission applied by your typical high street bank. Currency brokers specialise in these type of foreign currency transactions and can save you up to 5% on international payments compared to the banks.
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From Goldman Sachs:
We discuss our dollar outlook in the wake of the election, with many asking if USD strength in recent days can extend. We think so and see the election as something of a "reset.
Going into the election, the Dollar fell whenever odds of a Trump victory went up, in particular on the FBI disclosure of additional Clinton emails. As early signs of a Trump victory made their way into the markets during the night from Nov. 8 - 9, the Dollar fell in line with this pattern, but reversed sharply as President-elect Trump began giving his acceptance speech, which projected a conciliatory and inclusive message. This set off a rally in risk, which has morphed into markets trading a positive growth shock to the US: Dollar up, inflation breakevens up and SPX up.
Amid substantial uncertainty, our US team has kept is growth forecast unchanged. There is upside risk from the fiscal stimulus, while there is downside risk from an escalation in protectionism. But in either case, inflation is likely to be higher than before, which is what has probably helped drive inflation breakevens up. As a result, market pricing for Fed hikes has risen sharply, with tightening priced through Sep. 2019 now 86 bps, almost a full hike more than at points before the election.
Our point here is not that risks don't exist. Of course they do. Instead, it is that the policy mix has shifted in the direction of more inflation, which means that - given how dovish market pricing has been - there is room for the Dollar to catch up with where it should have been quite some time ago.
Our US team forecasts three hikes next year in addition to the one now likely in December. This is more than double what is priced and underpins our forecast for the Dollar to rise around 7 percent on a trade-weighted basis over that horizon.