Saturday 19 October 2019

Ulster Bank Markets Daily Top Three

US Federal Reserve Chair Janet Yellen
US Federal Reserve Chair Janet Yellen

Conor O’Driscoll

US interest rate markets and the dollar advance as key Fed officials indicate strengthened case for policy tightening

Fed Chair Janet Yellen made some moderately hawkish comments at the Federal Reserve’s annual symposium in Jackson Hole last Friday. The core message regarding the near term policy landscape was an acknowledgement that “the case for an increase in the federal funds rate has strengthened in recent months”, amidst ongoing gains in economic activity and continued solid improvement in the labour market. This was reinforced by Fed Vice-Chairman  Stanley Fischer, who remarked that Yellen’s comments were consistent with both a September tightening being potentially in play and the plausibility of a scenario where the Fed opt for two rate hikes in 2016. Both were careful to couch their statements with a re-emphasis on the data dependency of monetary policy decision making, underlining the heightened focus that will be placed on the nonfarm payrolls this Friday. The Bloomberg tracker on the degree to which markets are priced for a December hike has increased from 60% to ca. 65%. The dollar has strengthened by about 0.9% against both the euro and the pound since just before Yellen’s comments, with EUR/USD and GBP/USD opening at $1.1196 and $1.3151 this morning. EUR/GBP is broadly unchanged at £0.8523.

Mixed bag from the Eurozone M3 money report

Growth in lending to non-financial corporations accelerated from 1.7% in June to 1.9% y/y in July, the fastest pace since 2011. However, growth in lending to households remained at 1.8% y/y. Trends in lending to the private sector have seen steady, gradual improvement, with lending growth to non-financial corporations and households up from 1.0% y/y and 1.4% y/y respectively at the turn of the year. The ECB will continue to keep a close eye on these trends as they continually assess the effectiveness of their policies in boosting lending growth (which in turn should aid inflation trends).

Attention turns to key US data this week

Given the tone of the Fed’s communication last Friday, markets will be particularly sensitive to the results from the US nonfarm payrolls report for August this Friday. Expectations are for a moderate jobs gain of 180k and for the unemployment rate to tick down from 4.9% to 4.8%. Should the outturn come in line with expectations, it may help further strengthen the case for a December tightening, potentially underpinning a further strengthening in US interest rate markets and the dollar. It would probably take a material upside surprise, perhaps +220k, to really push the case for September. One potential fly in the ointment could come in the form of today’s personal income and spending report for July. Solid gains are expected in both spending and income, but the core (ex. energy & food) PCE deflator is expected to slip from 1.6% to 1.5% y/y. In the Euro Area, the interest will be in whether the economic confidence report tomorrow can continue to display stronger than expected resilience to Brexit related risks.

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