Fed leaves the December door open
Investors have jumped on the US dollar overnight as yesterday’s Federal Reserve meeting lifted the case for a hike in interest rates at the bank’s December meeting. In the statement accompanying the Fed’s decision to hold policy as is yesterday, references to global financial instability and risks were dropped in favour of language referring to a determination “whether to raise rates at the next meeting”.
Policymakers at the Federal Reserve have long thought that even moderate growth in the US in tandem with interest rate rises will allow for a continuation of improving labour market and inflation dynamics and last night’s statement underscores that belief.
It is now true that the December rate rise is back in play. Indeed it was only a week or so ago that we highlighted the risk that the market was underpricing the possibility of a hike before Christmas. The probability of a 0.25 per cent increase in interest rates on December 16th was around 32% yesterday morning. It is now 48%.
Back to the data
Those numbers may mean nothing in the grand scheme of things but a mixed data calendar as we are seeing at the moment may well lead to another coin-flip of a decision like we had in December. The data is the most important thing moving forward; its impact fell away as EM shares buckarooed through August and early September, but with those headwinds diminishing in the short term, every single data release will be scrutinised for a clue as to what may be coming down the track.
It is still our opinion that the emerging market picture, the likelihood of additional easing on the part of the European Central Bank, low inflation and sluggish wage growth will keep the Fed on hold into 2016
The increased focus on the US begins with the primary reading of US GDP for Q3 due this afternoon. As we said when reacting to the UK’s version yesterday; manufacturing globally took a knock in Q3 and the US will have been part of this. Today’s number is all about the consumer and if consumer spending is decent then the December rise argument will grow ever louder. We get US GDP at 12.30 GMT.
Some are looking to tighten, some are looking to loosen
Last night’s meeting of the RBNZ has seen a dip in the NZD as officials hinted that this month’s hold is not the start of a period of policy stability. Governor Graeme Wheeler told journalists that “some further reduction in the Official Cash Rate seems likely” and “this will continue to depend on the emerging flow of economic data. It is appropriate at present to watch and wait.”
At a speech by Ben Bernanke, former Chair of the Federal Reserve, I was struck by how much of the conversation was about central banks preserving ammunition for another crisis. The RBNZ are doing exactly the same thing.
The day ahead
Away from that US GDP announcement, a provisional reading of German inflation for October is due at 1pm. The European Central Bank and its board members have been extremely vocal on their fears that inflation will be unable to build meaningfully, hence the need for increased stimulus.