USD Update 15th of October

The US is still on track to be the first country out of the major currencies to increase interest rates, however at this point 2015 is definitely in question. With Core PCE at 1.3% and two months of sub 150,000 jobs growth, October is likely out of question. With poor job creation, flat wages, low inflation, a shrinking labor market, and global concerns stemming from China and emerging markets, it is becoming increasingly difficult for the Fed to begin normalization this year.

USD Update:

Interest Rate

Fed Funds Target Rate: 0.25%

Last Change: December 16, 2008 (0.50%)

Expected Future Change: 11% probability of a rate increase at the next meeting

Next Release: October 28

Inflation

Inflation Target: 2%

Period: Year ending August 31

CPI: 0.2%

Core CPI: 1.8%

Next Release: October 15

Employment

Month: September

Non-Farm Employment Change: 142,000 Expected: 201,000

Unemployment Rate: 5.1% Expected: 5.1%

Average Hourly Earnings: 0.0% Expected: 0.2%

Next Release: November 6

Growth

Period: Q2 (annualised)

Final GDP: 3.9% Expected: 3.7%

Next Release (Q3 Advance GDP): October 29

Analysis

The Fed kept the Federal Funds Rate on hold at the September 17 meeting. This was a highly anticipated release given it was the first real possibility of a Fed rate hike since 2006. The market was pricing a 30% probability of liftoff. The accompanying statement was relatively dovish with the Fed citing low inflation as the main cause of delaying liftoff; “Market-based measures of inflation compensation moved lower,” and “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” With Core PCE sitting at 1.3%, the Fed will likely need to see a move higher in inflation before being confidence that it is moving back towards the 2% target, especially since recent Labor market prints have disappointed.

The press conference also mentioned the recent financial market volatility and the slowdown in China reasons against raising rates at that meeting. The economic projections showed expectations of a lower rates than previously expected for 2016. Yellen did not rule out a rate increase at the October meeting however the market is pricing a December liftoff with higher probability; CME Group Fed Fund futures see 11% chance of October liftoff versus 39% of December. The USD sold off across the board after the rate decision and during the ensuing press conference. However USD losses were capped and the currency began to regain strength 24 hours post decision. By the close of trade on Friday, September 18, major pairs were back at pre-announced levels as the market still anticipates a rate hike soon. It is likely there will be sideways trading in USD pairs until we get some fresh news. Many Fed member’s stated that the decision to hold was a close call at the September meeting, however the meeting minutes released on October 8th failed to paint that picture. ”The tone of these minutes increases the risk of a later liftoff,” said J.P. Morgan economist Michael Feroli, who predicts a December rate increase, in a note to clients.

The employment situation in the US has recently come into question with back to back poor showings on the jobs creation front. After a stellar year of mostly 200,000 plus prints, August and September posted 136,000 and 142,000 respectively. While wages beat expectations in August at o.4%, they remained unchanged for September taking an October rate hike off the table, and potentially a December one as well. Labor force participation also declined to it’s lowest level in nearly 40 years, showing a shrinking labor market.

Regarding inflation, Core CPI rose 1.8% during the 12 months ending August 31, below estimates of 1.9%. Comparatively, CPI including Food and Energy has risen only 0.2% for the same period – showing the massive impact of oil prices. To reach their objective of 2% inflation the Fed need to be confident that Core inflation is trending towards that level before raising rates. Core Personal Consumption Expenditure Price Index for the 12 months ending August 31 saw price increases tick up to 1.3%. This is a tick in the right direction but still well off the Fed’s 2% target.

The post USD Update 15th of October appeared first on Jarratt Davis.

Source:: USD Update 15th of October

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