December Rate Hike Probabilities:
USD 84.3% – (Increasingly likely)
EUR 3.1% + (Think December 2019)
GBP 88.0% – (Done deal, probably this week)
CAD 26.9% – (Ain’t gonna happen now)
Fed Rhetoric 25bps
The signs point to growth on the rise
With GDP’s Friday surprise
So look for the Fed
To power ahead
With rate hikes bond bulls will despise
Although the Fed does meet this week, there is virtually no expectation that there will be any policy adjustments at the meeting as there is no press conference scheduled to follow. It seems that Chair Yellen, as did Chair Bernanke before her, are afraid to allow the market to simply respond to their actions without an explanation. One might think that market participants are incapable of understanding what the Fed is doing if the Fed doesn’t tell them explicitly (certainly Yellen believes that). I actually consider this to be one of the worst features of the current Fed, this effort at transparency, which has resulted in the entire market building the same position. And while I understand that it was an effective method of driving policy ease during the crisis, its shortcomings are far more evident now as the Fed attempts to adjust its policy. Forcing Encouraging investors to buy risky assets during a crisis is an understandable, if potentially misguided, central bank response. However, the palpable fear that those same central banks now exhibit over any market correction has delayed policy normalization for a number of years and allowed significant excesses to build in markets. It is why virtually every equity (and fixed income) valuation measure is at historically high levels, and why I remain concerned that when this market cycle turns (and it will turn at some point) the results will be at least as dire as the financial crisis in 2008/09 if not worse. There is no perpetual motion machine, the laws of physics see to that. Similarly there is no perpetual moneymaking machine, the laws of economics prevent that as well. With that in mind, I think it is fair to say that Wednesday’s Fed meeting will have virtually no impact on the market. I would look for the statement to be essentially unchanged from the September meeting and all focus will remain on December’s outcome.
It is with this backdrop that we turn to this morning’s FX market where the dollar is modestly softer. The thing is, given the dollar’s performance during the past two weeks, where it has rallied vs. essentially all its counterparts, a modest correction is only to be expected. In fact, Friday’s US GDP data showed that the economy is not only maintaining a fairly strong pace of growth, printing at a better than expected 3.0%, but that price pressures continue to build. The GDP Price Index printed at 2.2%, its highest level in five quarters, and potentially indicative that the Fed’s goal of generating price inflation, as opposed to asset inflation, is working. After all, they have generated asset inflation in spades for the past nine years! Nonetheless, the data are simply the latest in a long line that will help cement the Fed’s more hawkish rhetoric and insure that they raise rates, not only in December, but numerous times next year. Once again I will reiterate that the narrative that has been driving markets, that of policy convergence, is no longer valid. The Fed remains in tightening mode, despite the market’s reluctance to accept that, while the ECB remains in easing mode, despite the market’s reluctance to accept that either. The dollar has further to climb, although it won’t be in a straight line. Hence, today’s price action of a modest correction is perfectly normal.
A quick tour of the overnight activity shows that both Japanese and German Retail Sales data continue to grow as expected, if not even a little better. Meanwhile, German inflation data are drifting out from the states with the national number due at 9:00 this morning (exp 0.1%, 1.7% Y/Y). But Signor Draghi has made it clear that he is less concerned about Germany than about the Eurozone as a whole, and that easy money is the order of the next nine months, at least, on the continent. The other piece of news from Europe was a stronger than expected Economic Confidence number, printing at multi-year highs. However, the continued absence of measured price inflation will keep the ECB at bay for a long time to come.
Otherwise there has been remarkably little news of note released. And that includes the emerging market bloc as well. While the dollar is generally softer there, the movement is so modest and broad based, it can only be a position squaring exercise.
As this is the first week of the new month, we do see a great deal of US data as follows:
Today Personal Income 0.4%
Personal Spending 0.9%
PCE Core 0.1% (1.3% Y/Y)
Dallas Fed Mfg 21.0
Tuesday Employment Cost Index 0.7%
CaseShiller Home Prices 5.90%
Chicago PMI 60.0
Consumer Confidence 121.0
Wednesday ADP Employment 200K
ISM Mfg 59.4
ISM Prices Paid 67.3
Construction Spending -0.2%
FOMC Rate Decision 1.00%-1.25% (unchanged)
Thursday BOE Rate Decision 0.50% (+0.25%)
Initial Claims 235K
Nonfarm Productivity 2.5%
Unit Labor Costs 0.4%
Friday Nonfarm Payrolls 310K
Private Payrolls 300K
Mfg Payrolls 18K
Unemployment Rate 4.2%
Average Hourly Earnings 0.2%
Average Weekly Hours 34.4
Participation Rate 63.1%
Trade Balance -$43.3B
ISM Non-Mfg 58.5
Factory Orders 1.2%
So as you can see there is a ton of stuff coming out this week. And expectations are running high for the data to demonstrate continued strength in the US economy. Clearly the NFP number is expected to make up for last month’s hurricane impacted number, so I would look for the average as a better idea of the run rate. In this case, that would be about 138K, not dissimilar to what we were seeing before the hurricanes. But looking at the ISM data, the Personal Spending data and the confidence data, it is very easy to understand why the Fed is going to stay the course. And this is true regardless of who is the next Fed Chair. This week should remind everyone why the dollar is likely to recoup a significant portion of its lost value from earlier this year. As I have been discussing for a while, hedgers, take advantage before the move starts in earnest.
Your Limericks are really sublime, I’m a Japanese speaker, but I love this.
Thank you. I try to keep my audience engaged and appreciate that you find them worthwhile. And in truth, Haiku are far more difficult to do well, although I do try when appropriate.