Global Markets Brace for Fed Hike Next Month
The Fed has been targeting an inflation rate of 2%, an unemployment rate of 4.9% and significantly enhanced economic conditions on the ground. A slew of recent economic data confirms that conditions on the ground are improving a lot quicker than what analysts expected. The nonfarm payrolls for October registered a figure of 271,000 - substantially greater than the 180,000 consensus estimate figure. And the US unemployment rate dropped from 5.1% to 5.00%, edging much closer to the 4.9% benchmark figure set by the Fed.
The US Dollar Index which measures the greenback against a basket of currencies was valued at 99.16 on Friday, 6 November. The EUR/USD pair plunged by 16.17% for the year, the AUD/USD pair has lost 20.06% for the year and the NZD/USD pair has declined by 17.63% in the same period. Across the board, USD buying power has increased as other currencies have whittled away. The three currencies that have slipped dramatically against the USD this year include the Russian Ruble (-66.17%), the South African Rand (-26.94%), and the Brazilian Real (-58.44%).
Important Upcoming Economic Announcements
USD strength is gaining momentum on the back of high expectations of a rate hike. Important economic announcements in the form of Import and export price data (Month-on-Month and Year-on-Year) are going to be released on Tuesday, 10 November 2015. The US retail sales report Month-on-Month is slated for Friday 13, November 2015 at 08:30. During September, US retail sales increased by 0.10% month-on-month and the consensus forecast for October is 0.3%. The retail sales report will be an important indicator of overall performance of the US economy.
It measures the total sales for retails goods and other services for a one-month period. Retail sales cover the full spectrum including the biggest three components: cars and parts (20%), food and beverage at (13%) and standard merchandise stores (12.5%). The big announcements will be made on Tuesday 17 November at 8:30 AM with the Core Inflation Rate (year-on-year) and the Inflation Rate (year-on-year). The annual core inflation rate was measured at 1.9% in September from 1.8% in August 2015. While the 2% target is close, it is unlikely that prices have risen sufficiently to warrant that owing to the problems associated with historically weak crude oil and commodities prices.
Timing is Right to Adjust Fed Funds Rate
With all the chips in place, the time is right for the Federal Reserve Bank to look towards a rate hike at its December meeting. Most all the data to date supports raising the interest rate from its multi-year low. Janet Yellen has been rather non-committal in her estimation of when the time is right to raise interest rates, but on Wednesday, 4 November 2015 she said she willing to move if conditions on the ground warranted a rate hike. Even with an uptick in inflation expected on the 17 November, inflation will still be below the 2% threshold, but only marginally so. At the current unemployment rate, the Fed believes that figure is as close to full employment as possible – another positive sign. Nobody is quite sure of precisely what the rate hike will look like. Most analysts expect it to take the form of a gradual uptick, with Goldman Sachs’ settling on December as far back as June 2015. Even Barclays (L:BARC) analysts are suggesting a move to December from March 2016.
