There seems to be a broad consensus on the trajectory of policy in
the remaining weeks of the year. Barring a major shock or surprise the Federal Reserve will
hike rates next month. The ECB’s course is
set until at least the middle of next year
when the current policy will begin to be debated
in earnest.
The BOJ’s Kuroda has made it clear that the BOJ will continue
to pursue Quantitative and Qualitative Easing (QQE) and Interest Rate Targeting
as the inflation target continues to be pushed out in time. The Bank of
England and the Bank of Canada previously raised interest rates but left little doubt in investors’ minds
that there is no urgency to do so again in the coming months.
the remaining weeks of the year. Barring a major shock or surprise the Federal Reserve will
hike rates next month. The ECB’s course is
set until at least the middle of next year
when the current policy will begin to be debated
in earnest.
The BOJ’s Kuroda has made it clear that the BOJ will continue
to pursue Quantitative and Qualitative Easing (QQE) and Interest Rate Targeting
as the inflation target continues to be pushed out in time. The Bank of
England and the Bank of Canada previously raised interest rates but left little doubt in investors’ minds
that there is no urgency to do so again in the coming months.
US interest rates (five
years and beyond) bottomed on September 8. The 10-year yield is up 40 basis points since then,
as is the 2-year yield. The rise in US yields completely accounts for the
37 bp increase in the two-year premium over Germany, which we find, despite the
talk of new divergence, a good guide to the euro-dollar exchange rate.
The US 10-year premium over Japan has widened nearly 35 bp over the same period.
years and beyond) bottomed on September 8. The 10-year yield is up 40 basis points since then,
as is the 2-year yield. The rise in US yields completely accounts for the
37 bp increase in the two-year premium over Germany, which we find, despite the
talk of new divergence, a good guide to the euro-dollar exchange rate.
The US 10-year premium over Japan has widened nearly 35 bp over the same period.
The dollar bottomed against
the euro, yen, Swiss franc and Canadian dollar on September 8 as well. Sterling is a notable
exception. It bottomed at the start of the year. The Australian
dollar’s low for the year, like sterling,
was also set at the very start of the
year. The New Zealand dollar by
contrast, recorded its low in May and recently retested the level as investors
(over?) reacted the change in the New
Zealand government and policies, including changing the central bank’s remit.
the euro, yen, Swiss franc and Canadian dollar on September 8 as well. Sterling is a notable
exception. It bottomed at the start of the year. The Australian
dollar’s low for the year, like sterling,
was also set at the very start of the
year. The New Zealand dollar by
contrast, recorded its low in May and recently retested the level as investors
(over?) reacted the change in the New
Zealand government and policies, including changing the central bank’s remit.
The economic data scheduled
for release in the coming days are unlikely to have policy implications. Or, to the extent that the data
impacts expectations, it may simply reinforce existing views.
for release in the coming days are unlikely to have policy implications. Or, to the extent that the data
impacts expectations, it may simply reinforce existing views.
The US data is likely to
show an economy recovering from the impact
of the storms, and the stability of price pressures somewhat above the troughs
seen earlier this year.
Both the St. Louis and NY Fed GDP trackers are estimating growth in Q4 at a
little more than 3%. While the quarter is nearly half over, and there is
much data still to come, the take away is this appears
another quarter of above-trend growth.
show an economy recovering from the impact
of the storms, and the stability of price pressures somewhat above the troughs
seen earlier this year.
Both the St. Louis and NY Fed GDP trackers are estimating growth in Q4 at a
little more than 3%. While the quarter is nearly half over, and there is
much data still to come, the take away is this appears
another quarter of above-trend growth.
Headline October CPI may
ease on softer gas prices, but the core rate is likely stable at 1.7% for the
sixth consecutive month.
Frankly, given the base effect, it may be difficult the year-over-year measure
to head much higher over the next three months. Headline retail
sales soared 1.6% in September as nature (storms),
and rising prices conspired to flatter the data. However, a flattish
report should be surprising in
October. On the other hand, the GDP measure is expected to be a solid
0.3% after a 0.4% rise in September. Industrial output is expected to
rise 0.5%, lead by a similar rise in
manufacturing.
ease on softer gas prices, but the core rate is likely stable at 1.7% for the
sixth consecutive month.
Frankly, given the base effect, it may be difficult the year-over-year measure
to head much higher over the next three months. Headline retail
sales soared 1.6% in September as nature (storms),
and rising prices conspired to flatter the data. However, a flattish
report should be surprising in
October. On the other hand, the GDP measure is expected to be a solid
0.3% after a 0.4% rise in September. Industrial output is expected to
rise 0.5%, lead by a similar rise in
manufacturing.
The UK reports inflation,
employment and retail sales in the week ahead. Consumer prices may not
have peaked yet in the UK, but they seem close. The quarterly inflation report
released earlier this month suggested inflation will move above 3% in October
and this will ostensibly lead to a letter from Carney to Hammond to
explain. Yet, with a little luck,
inflation would have already begun easing by the time the letter must be delivered.
employment and retail sales in the week ahead. Consumer prices may not
have peaked yet in the UK, but they seem close. The quarterly inflation report
released earlier this month suggested inflation will move above 3% in October
and this will ostensibly lead to a letter from Carney to Hammond to
explain. Yet, with a little luck,
inflation would have already begun easing by the time the letter must be delivered.
Although
the UK enjoys what economists consider full employment, wage growth has failed
to keep pace with inflation. Earnings
are reported with an extra month lag from
the employment data. Earnings growth, excluding bonuses, rose 2.4% in the three months (annualized) in September
2016, and is expected to have risen 2.2% in the three months (annualized)
through September 2017. Meanwhile,
consumer prices (CPIH) has risen from 1.3% in the year through September 2016
to 2.8% through September 2018.
the UK enjoys what economists consider full employment, wage growth has failed
to keep pace with inflation. Earnings
are reported with an extra month lag from
the employment data. Earnings growth, excluding bonuses, rose 2.4% in the three months (annualized) in September
2016, and is expected to have risen 2.2% in the three months (annualized)
through September 2017. Meanwhile,
consumer prices (CPIH) has risen from 1.3% in the year through September 2016
to 2.8% through September 2018.
UK retail sales are expected
to have stabilized after sharp falls in September. Excluding auto fuel, retail sales may be
flat after a 0.7% decline in September. The year-over-year pace is
likely to post its first contraction in 4 1/2 years. It may
prove temporary as the base effect will be favorable over the next couple of
months. However, the squeeze on household finances may not improve much
until the spring.
to have stabilized after sharp falls in September. Excluding auto fuel, retail sales may be
flat after a 0.7% decline in September. The year-over-year pace is
likely to post its first contraction in 4 1/2 years. It may
prove temporary as the base effect will be favorable over the next couple of
months. However, the squeeze on household finances may not improve much
until the spring.
For the eurozone, investors
will get more details about data that have already been reported, like the estimate for Q3 GDP and the flash CPI. The September industrial production
data that are new are embedded in the GDP figures. The take
away is that the eurozone economy continues to operate a strong pace. The
unexpected drop in the core CPI (from 1.1% to 0.9%) may be explained by quirks that do not reflect the general price level,
like holiday packages, and some administered prices.
will get more details about data that have already been reported, like the estimate for Q3 GDP and the flash CPI. The September industrial production
data that are new are embedded in the GDP figures. The take
away is that the eurozone economy continues to operate a strong pace. The
unexpected drop in the core CPI (from 1.1% to 0.9%) may be explained by quirks that do not reflect the general price level,
like holiday packages, and some administered prices.
Japan reports its first
estimate of Q3 GDP.
After a robust Q2 (2.5% annualized) the Japanese economy appears to have slowed
considerably. However, the 1.5% median forecast in the Bloomberg survey
would still be well above trend growth. The risk may be on the downside,
with consumption and housing being a drag, partly blunted by export
growth. Of note, the GDP deflator may turn positive, albeit barely, for
the first time since Q2 2016.
estimate of Q3 GDP.
After a robust Q2 (2.5% annualized) the Japanese economy appears to have slowed
considerably. However, the 1.5% median forecast in the Bloomberg survey
would still be well above trend growth. The risk may be on the downside,
with consumption and housing being a drag, partly blunted by export
growth. Of note, the GDP deflator may turn positive, albeit barely, for
the first time since Q2 2016.
There are
three political issues, which will likely shape the investment climate. The most important is US tax reform. Optimists still think a
vote by both houses can be held by the middle of next month, ahead of the
winter recess. We are skeptical, and the point we have made that is worth
repeating is that, like health care
reform, the key debate is not between the two main parties, but within the
Republican Party.
three political issues, which will likely shape the investment climate. The most important is US tax reform. Optimists still think a
vote by both houses can be held by the middle of next month, ahead of the
winter recess. We are skeptical, and the point we have made that is worth
repeating is that, like health care
reform, the key debate is not between the two main parties, but within the
Republican Party.
Despite months of leaders of
both houses working with the Trump Administration, the bills are dramatically
different on several key issues and note
that the scoring still places the evolving House version more than the agreed-upon
$1.5 trillion addition deficit over the next ten years. There are also conflicting
incentives for House Republicans, who will face voters next year, that herald
from states that Trump lost in 2016. It appears that prospects of fiscal
reform a remote.
both houses working with the Trump Administration, the bills are dramatically
different on several key issues and note
that the scoring still places the evolving House version more than the agreed-upon
$1.5 trillion addition deficit over the next ten years. There are also conflicting
incentives for House Republicans, who will face voters next year, that herald
from states that Trump lost in 2016. It appears that prospects of fiscal
reform a remote.
In Europe, the negotiations
over the UK’s exit from the EU continue to be an important talking point. New wrinkles appear to have
emerged, including the Irish border, that seems as intractable as any challenge
of the divorce/amputation. There is speculation that Prime Minister May
will shortly make a more detailed commitment of the sums the UK will pay to
fulfill its obligations. This is in the hope that next month, the
negotiations can turn to the post-separation relationship. It is by no
means a done deal, and there is a certain pessimism that seems to be
growing.
Lastly, we note the apparent
progress in the formation of the next German government. It appears that the Merkel may soon
concede the coveted finance ministry portfolio to its new coalition partner
(likely the FDP). However, Merkel may strip the international (e.g.,
Europe) responsibilities from it and transfer them to the Economic
Ministry. The Finance Minister’s remit would cover the domestic economy.
The Economic Minister would attend the Eurogroup and G7 meetings, for
example. Such considerations may be important as investors attempt to
assess the policy implications of the new coalition government.
progress in the formation of the next German government. It appears that the Merkel may soon
concede the coveted finance ministry portfolio to its new coalition partner
(likely the FDP). However, Merkel may strip the international (e.g.,
Europe) responsibilities from it and transfer them to the Economic
Ministry. The Finance Minister’s remit would cover the domestic economy.
The Economic Minister would attend the Eurogroup and G7 meetings, for
example. Such considerations may be important as investors attempt to
assess the policy implications of the new coalition government.