USD news - page 17
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US initial jobless claims 254k vs 260k exp
US initial jobless claims week ending 4 November 2016
US Federal Budget Deficit $44.2bn For October, Trump Plans Under Scrutiny
The US Federal budget recorded a deficit of $44.19bn for October compared with a deficit of $136.6bn the previous year. Receipts rose 5.0% over the year while there was a sharp decline in spending of over 18%, although this was distorted by calendar effects and the impact of Medicare payments.
When adjusted for calendar effects, there was an October deficit of $84bn from $88bn the previous year.
Income tax receipts rose by 11% over the year, but there was a sharp decline in corporate tax receipts. There are major problems in extrapolating from monthly data, but there has been a consistent pattern of weak corporate tax receipts throughout the last year.
For fiscal 2016, the deficit amounted to $587.3bn, equivalent to 3.2% of GDP, an increase from 2.5% of GDP the previous year, the first increase in terms of GDP since 2009.
The Congressional Budget Office (CBO) is currently projecting a deficit of $594bn for fiscal 2017, although there is a very strong probability that there will be changes to fiscal policy under the new Administration, which will force major changes to the forecasts.
Fiscal policy has received only limited attention over the past few months, especially with effective gridlock between the Administration and Congress, but the budget will be a much bigger focus over the next few months and is likely to have a substantial market impact.
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Dollar Extends Gains But Resistance Nears For Many Pairs
Investors continued to buy U.S. dollars Thursday, 48 hours after the 2016 Presidential election. We didn’t get a chance to share our views Wednesday because we were busy trading election night and the day after but there’s no doubt that the outcome was a big surprise. It sparked widespread volatility and short covering in the financial markets but when the dust settled, the U.S. dollar and U.S. stocks recovered all of their steep losses. Instead of mourning, investors cheered a Trump victory as they hoped he will be positive for the economy. He ran on a campaign of aggressive spending and this is the first time in 8 years that there’s the prospect of a sizeable fiscal stimulus package. His victory speech was conciliatory and heavily Keynesian, which went a long way in boosting risk appetite and lifting Treasury yields. Perhaps feeling the weight of his new responsibilities, Trump is toning down his abrasiveness and opening his ears to outside counsel and advice. He may not have a specific plan for creating new jobs, offsetting the tax cuts he plans or finding the money for infrastructure spending outside of ballooning the deficit, but the mere promise of a fiscal stimulus program at a time when the Federal Reserve is preparing to raise interest rates reinvigorated hope for a new cycle of growth.
The odds for a rate hike after the election hasn’t changed and in fact increased from 80% to 84% according to Fed Fund futures. This is not a big surprise because stocks recovered strongly. Had they fallen 500 or 600 points on Wednesday, the Fed would most certainly reconsider its plans for tightening. Instead, with the Dow Jones Industrial Average at a record high, Janet Yellen has an even stronger case to boost rates in December. It would be her last decision before President Trump can pressure the central bank and the move would show that she isn’t buckling on future political pressure. Data was also good with jobless claims falling 11k. Weekly claims have remained below 300K for 88 weeks, the longest stretch in more than 45 years. The University of Michigan consumer sentiment index is scheduled for release Friday and a steady reading is expected. Meanwhile, it is important to recognize that rising U.S. yields are the primary reason for the dollar’s strength. Ten-year Treasury yields rose above 2% on Wednesday, taking USD/JPY above 105 and Thursday’s extension in rates drove the pair within 5 pips of 107. There’s no question that USD/JPY is overbought, but we could see the pair break 107 before the rally finally fizzles. Of course, it could also stall here, right at the 200-day SMA and 38.2% Fibonacci retracement of the 2011 to 2015 rally.
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November University of Michigan Consumer Confidence Strengthens To 91.6, Inflation Expectations Rise
The US University of Michigan consumer confidence index strengthened to a preliminary 91.6 for November from 87.2 the previous month. This was the highest reading since July and also above consensus expectations of a figure around 87.5.
The current conditions index strengthened to 105.9 from 103.2 to give a 1.5% gain over the year, while the expectations index advanced to 82.5 from 76.8, although there was a slight decline over the year.
According to the survey, overall confidence in the outlook for the economy improved and readings of this level are consistent with annual GDP growth of around 2.5%. The overall survey reading was just above the 2016 average.
Significantly, there was an increase in inflation expectations in the data with both the 1-year and 5-year expected rates increasing to 2.7% from 2.4% the previous month. The increase may not be significant, but does suggest that inflation expectations have bottomed out.
This is potentially very important given that the Fed has been concerned that inflation expectations have been declining to dangerously low levels and this has been a major barrier to raising interest rates.
The data was collected before the US Presidential election and there will be some caution over potential near-term trends.
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What Are The Limits To USD Gains Now? Where To Target?
For the remainder of 2016, we would focus on three sets of risks: internal, external, and market.
1) Internal: A stable risk environment post-election is probably contingent on a message from the incoming president (and his team) that continues to emphasize a pro-growth agenda. A different message or cabinet appointees who are not viewed as market friendly could challenge the internal risk environment.
2) External: Reaction from foreign governments is assumed to be cautious in the aftermath of the vote, but the geopolitical environment is inherently unpredictable, and an international stress event during the transitional period between administrations might be challenging to manage. Markets might also grow more concerned about anti-establishment political movements in Europe following the US election result. Somewhat counterintuitively, these concerns might help EURUSD more than they hurt if they lead to broader risk aversion which limits the Fed’s capacity to move ahead with rate hikes and supports current account surplus currencies generally.
3) Market: if US yields adjust too quickly, particularly long-end yields, it could cause an adverse reaction in the risk environment which might ultimately derail Fed hikes. However, we would expect initial gains in the USD during the period of rising US rates and thus think of this more as a limiting factor for USD strength rather than an immediate risk.
Our current forecasts look for EURUSD to reach 1.08 by year-end 2016, and 1.05 by the end of 2017. Meanwhile, we expect USDJPY to reach 108 by the end of this year and recover to 120 next year.
Dollar hits 9-month highs on Trump bets
The dollar hit nine-month highs against a basket of the other major currencies on Monday, boosted by expectations that a wave of fiscal spending and tax cuts under a Trump administration will spur growth and inflation.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, was up 0.74% at 99.72, the highest level since January 29.
Last week the index rose 2.02%, the largest weekly gain since November 2015.
Investors expect that Trump's campaign pledges to increase fiscal spending, cut taxes and loosen financial regulation will prompt the Federal Reserve to hike interest rates as economic growth and inflation pick up.
Investors are currently pricing an 81.1% chance of a rate hike at the Fed's December meeting; according to federal funds futures tracked Investing.com's Fed Rate Monitor Tool.
Expectations for higher rates typically boost the dollar by making it more attractive to yield seeking investors.
US retail sales Oct mm +0.8% vs +0.6% exp
US October retail sales report 15 Nov
September 2016 US business inventories 0.1% vs 0.2% exp m/m
September 2016 US business inventories 15 November 2016
October 2016 US PPI final demand 0.0% vs 0.3% exp m/m
Details form the October 2016 US PPI final demand data report 16 November 2016
November 2016 US NAHB Housing market index 63 vs 63 exp
November 2016 US NAHB Housing market index data report 16 November 2016