Last week, the US equity market posted its best gains since July and
it seems that further gains could be in store. Nowcast models suggest
the US economy has expanded by about 3% in Q3, but our US economics team
suggests that Q4 growth is set to slow from here. The degree of the
slowdown may decide whether the Fed may increase rates in December or
not. Our verdict remains for no hike suggesting markets repricing the current 54% probability of the Fed moving by December.
At this stage weaker US data suggests lower rates for longer. Anyhow,
even hawkish members of the FOMC such as the dove-turned-hawk Rosengren
put the need for higher interest rates into the context of ‘market
imbalances’ instead of economic needs, underlining that the Fed's
current rate hike cycle may be an unusually flat profile, arguing too
for USD weakness.
There had been a number of hints suggesting the economy slowing from here, most
notably the recent decline of consumer confidence, weak August retail
sales and weaker credit demand.Last Friday, tax collection data showed a
steep decline too.
Hence, it seems that our call for a weaker US economy / weaker USD is well embedded within the current US economic findings. The
biggest risk to our call for seeing the Fed's broad USD index falling
4% from here comes from US politics where the debate between the two
Presidential Candidates Clinton and Trump will be in focus this evening.
The MXN’s high weighting (11.7%) within the Fed's USD index plus the
impact on risk appetite could lead to a higher USD should markets view
the outcome of the debate unfavourably.