Previous week: 23 October 2017 – 27 October 2017
UK Prelim GDP—4.30pm 25 October 2017
The UK third quarter GDP q/q came in at +0.4%, beating the consensus of +0.3%. On a year on year basis, GDP grew +1.5%. A stronger than expected economic growth rate adds to the narrative of a rate hike by the Bank of England next week.
Bank of Canada Overnight rate, rate statement, monetary policy report—Wednesday 25 October 2017, 10pm
The Bank of Canada decided not to hike interest rates and stay pat at 1.00%. Last Friday’s weak CPI and core retail sales figures out of Canada should give the central bank pause in their tightening of monetary policy.
Summary : The Bank of Canada thinks that inflation currently at +1.6% will move back up to 2% by the second half of 2018, which is slower than expected. The reason for this decreased pace is due to the strength of its currency. Economic growth is close to full potential but is subject to “substantial uncertainty about geopolitical developments and fiscal and trade policies, notably the renegotiation of the North American Free Trade Agreement.” There is still slack in the labour market.
Key sentences from Bank of Canada Press Release 25 October 2017:
- Inflation has picked up in recent months, as anticipated in the Bank’s July Monetary Policy Report(MPR), reflecting stronger economic activity and higher gasoline prices.
- The Bank projects inflation will rise to 2 per cent in the second half of 2018. This is a little later than anticipated in July because of the recent strength in the Canadian dollar.
- The Bank still expects global growth to average around 3 1/2 per cent over 2017-19. However, this outlook remains subject to substantial uncertainty about geopolitical developments and fiscal and trade policies, notably the renegotiation of the North American Free Trade Agreement.
- Canada’s economic growth in the second quarter was stronger than expected, and was more broad-based across regions and sectors. Growth is expected to moderate to a more sustainable pace in the second half of 2017 and remain close to potential over the next two years, with real GDP expanding at 3.1 per cent in 2017, 2.1 per cent in 2018 and 1.5 per cent in 2019.
- The Bank estimates that the economy is operating close to its potential. However, wage and other data indicate that there is still slack in the labour market. This suggests that there could be room for more economic growth than the Bank is projecting without inflation rising materially above target.
US Crude oil inventories—10.30 pm 25 October 2017 Wednesday
US crude inventories increased by +0.856 million barrels on the expectation of -3 million decrease. Baker Hughes US oil rig count increased by 1 from 736 to 736. Oil production was 9507 barrels per day for week ending 20/10/2017, an increase from 8406 barrels per day in the previous week. This recovery in oil production is because refineries were turned back on after Hurricane Nate.
European Central Bank minimum bid rate, press conference—7.45 pm 26 October 2017 Thursday
- The ECB kept all three interest rates unchanged.
“The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively.”
- The ECB expects “interest rates to remain at present levels for an extended period of time, well past the horizon of net asset purchases.”
- The ECB did indeed cut its QE programme in half, from 60 to 30 billion euros a month.
From January 2018 the net asset purchases are intended to continue at a monthly pace of €30 billion until the end of September 2018.”
Taken from Zerohedge detailing the key headlines from Mario Draghi’s statement and Q&A:
- DRAGHI SEES RATES AT PRESENT LEVEL WELL PAST END OF QE
- DRAGHI: ECB WILL REDUCE MONTHLY BOND BUYING TO EU30B IN JAN.
- DRAGHI SAYS ECB WILL BUY BONDS UNTIL AT LEAST SEPT.
- DRAGHI REITERATES PLEDGE TO BOOST QE IN SIZE, LENGTH IF NEEDED
- DRAGHI SAYS ECB WILL REINVEST FOR EXTENDED PERIOD AFTER QE END
- DRAGHI SAYS REINVESTMENTS WILL HELP DELIVER APPROPRIATE STANCE
- DRAGHI EXTENDS FULL ALLOTMENT IN REFIS THROUGH END 2019
- DRAGHI SAYS DECISIONS WILL PRESERVE FAVORABLE CONDITIONS
- DRAGHI SAYS DOMESTIC PRICE PRESSURES REMAIN MUTED
- DRAGHI SAYS RECALIBRATION OF QE REFLECTS CONFIDENCE ON PRICES
From the Q&A:
- DRAGHI SAYS ECB DIDN’T DISCUSS QE COMPOSITION AS OF JAN.
- DRAGHI: ECB TO CONTINUE TO BUY SIZEABLE AMOUNTS OF CORP BONDS
- DRAGHI: ECB TO PUBLISH MONTHLY REDEMPTIONS AS OF JANUARY
- DRAGHI SAYS ECB DIDN’T DISCUSS ALTERNATIVE QE SCENARIOS
- DRAGHI SAYS ATMOSPHERE IN COUNCIL WAS POSITIVE
- DRAGHI SAYS GOVERNORS STRESSED UNABATED GROWTH MOMENTUM
- DRAGHI SAYS ECB FORESEES V-SHAPED FORM OF INFLATION
- DRAGHI SAYS THERE WERE DIFFERENT VIEWS IN COUNCIL ON SCENARIOS
- DRAGHI SAYS GUIDANCE ON REINVESTMENT NOT RELATED TO RATES
- DRAGHI SAYS STOCK OF QE HOLDINGS HAS BECOME MORE IMPORTANT
- DRAGHI SAYS QE DESIGN FLEXIBLE ENOUGH TO COPE WITH ANY LIMITS
- DRAGHI SAYS REINVESTMENT IMPORTANT COMPONENT OF ECB POLICY
- DRAGHI SAYS ECB DIDN’T DISCUSS QE PARAMETERS, LIMITS TODAY
- DRAGHI SAYS REINVESTMENTS TO BE CARRIED OUT IN FLEXIBLE WAY
US Advanced GDP q/q—8.30pm 27 October 2017
President Trump delivers again. Q3 GDP q/q came in at a whopping +3.0% in its first estimate. However, apparently the impact of the hurricanes were not taken into account by the BEA.
“These impacts on production are included, but not separately identified, in the source data that BEA uses to prepare the estimates of GDP; consequently, it is not possible to estimate the overall impact of Hurricanes Harvey and Irma on 2017 third quarter GDP.”
Donald and his plan to cut taxes just overcame its second hurdle
The House of Representatives took a step closer towards cutting/reforming taxes.
Nothing is more important to the Republicans than cutting taxes. Unlike healthcare, it seemed that republicans in the House of Representatives and Senate are hell bent to get the votes to reduce the tax rate (for the wealthy). I believe they will get the votes needed in the House of Representatives and the Senate to pass the tax cut bill before the turn of the New Year. The market is already pricing in a successful passage of the tax cut bill through Congress in the capital markets.
Coming week: 23 October 2017 – 27 October 2017
Bank of Japan monetary policy statement, BOJ outlook report, BOJ policy rate, BOJ press conference—31 October 2017 Tuesday
Though the members of the BOJ is now more dovish than before (9 doves and 0 hawks), no change in monetary is expected. This is because inflation rate in Japan seemed to be creeping back up, implying that there is some success in the policies they implemented with regards to defeating deflation / disinflation. September 2017’s core inflation y/y was +0.7%, matching the number in August. Inflation in Japan have improved greatly ever since it hit a low in September 2016 at -0.5%. That is an increase in inflation rate of 1.2% in 12 months.
No doubt the current policies have gotten inflation up by 1.2%. However, it is still 1.3% away from the 2% target. The question to ask is: Are the current policies sufficiently effective for this trend in inflation to continue to rise to 2%? And if so, will inflation be sustained at 2% and not be one of the past times where it belly flopped and collapsed back down to zero? If not, should the BOJ start to consider further loosening its monetary policies?
US Crude oil inventories—10.30 pm 01 November 2017 Wednesday
Another draw in inventories?
FOMC Statement, Federal funds rate—02 November 2017 2am
No press conference = no change in monetary policy. Yellen: “Every meeting is a live meeting”. Me: “Only meetings with press conferences are live meetings.”
Bank of England inflation report, MPC official bank rate votes, Official bank rate, BOE Governor Mark Carney speaks—8pm Thursday 02 November 2017
Consensus is for 9 votes in favour of a rate increase from +0.25% to +0.50%. As written extensively previously, there is enough votes (5/9) in order for a rate increase. As Mark Carney puts it, the BOE is “just easing off the accelerator”.
US Non-farm employment change, unemployment rate, average hourly earnings m/m, participation rate—8.30pm 03 November 2017 Friday
Consensus is for a whopping 311k jobs created in September.
After selling off hard for some time, NZD/USD is now at a crucial support zone at 0.68.
GBP/USD long to watch and wait
The British Pound had been in an uptrend since the start of the year.
There are nine members in the BOE MPC. With 3 doves coming out publicly saying that they are now hawkish, the whip count is now 5 members in favour for rate hike. This implies that a simple majority is now present to raise interest rates.
|Name||Voting Record||Dove/Hawk||Edmund’s Whip Count|
|Mark Carney||0 to increase, 46 to maintain, 1 to reduce||Dove||Raise|
|Ben Broadbent||0 to increase, 71 to maintain, 1 to reduce||Dove||?|
|Sir Jon Cunliffe||0 to increase, 42 to maintain, 1 to reduce||Dove||?|
|Sir David Ramsden||0 to increase, 1 to maintain, 0 to reduce||Dove||?|
|Andrew Haldane||0 to increase, 35 to maintain, 1 to reduce||Dove||Raise|
|Ian McCafferty||14 to increase, 42 to maintain, 1 to reduce||Hawk||Raise|
|Michael Saunders||3 to increase, 6 to maintain, 0 to reduce||Hawk||Raise|
|Silvana Tenreyro||BOE: 0 to increase, 2 to maintain, 0 to reduce
Bank of Mauritius: 0 to increase, 8 to maintain, 3 to reduce
|Dr Gertjan Vlieghe||0 to increase, 19 to maintain, 2 to reduce||Dove||Raise|
|Edmund’s prediction||5 to raise / 9|
Looking at the 10 year chart of UK’s inflation, is it not inconceivable that inflation will rise up to 5%? Quoting the Bank of England from monetary policy statement dated 14 September 2017: “Headline and core CPI inflation in August were slightly higher than anticipated. Twelve-month CPI inflation rose to 2.9% and is now expected to rise to above 3% in October.” And yes, it did hit 3.0% in September.
UK Wage growth:
Wage growth has been steady at around 2% for several years. However, in real terms, wages are shrinking because inflation is running at 2.9%, which is higher than the pace of wage growth.
The labour market gets tighter every month and is definitely getting very close to the natural rate of unemployment.
Annualised GDP growth rate had been steady at around 2% since 2010.
USD’s side of the argument:
- The Federal Reserve is very far from reaching their 2% PCE core inflation target. It is currently at 1.3% and moving away from the 2% target. The 91.7% rate hike probability for December’s meeting seemed to totally dismiss any concerns by the Fed for the lack of inflation.
- Donald Trump is (and had always been) a wild card. He (and the GOP) failed to repeal and replace of Obamacare. He may just fail to pass his tax cut / reform plan (which has much greater implications to corporate profitability). However, I am still of the opinion that Republicans will fall in line and support the tax cut bill.
- Donald’s beef with Kim. The ongoing escalation of tensions with DPRK led to buying of safe havens like US Treasuries, Japanese Yen, and Gold. Lowering of yields in US Treasuries will make it hard for the US Dollar to rally.
- The Federal Reserve is tightening their monetary policy (argument for USD strength).
Image of US core PCE year on year taken from Investing.com:
Fed’s rate hike odds is now at 97.8% for December’s meeting. Basically a rate hike in December has already been priced in. But, the issue is whether there is a chance of a surprise from the Fed by them choosing to stand pat and not hiking in December. This is especially so when September’s CPI was another miss and also when the Fed mentioned that low inflation may be due to persistent factors too.
“Nevertheless, many participants expressed concern that the low inflation readings this year might reflect not only transitory factors, but also the influence of developments that could prove more persistent, and it was noted that some patience in removing policy accommodation while assessing trends in inflation was warranted.”