Previous week: 16 October 2017 – 20 October 2017
UK CPI y/y—5.30pm 17 October 2017
UK CPI hit a new high at 3.0% for the month of September. The expectation was for inflation to hit 3%. It was 2.9% in the month of August. Rising inflation will increase pressure on the BOE to raise the bank rates.
US Crude oil inventories—10.30 pm 18 October 2017 Friday
US crude inventories decreased by -5.73 million barrels on the expectation of -3.2 million decrease. Baker Hughes US oil rig count decreased by 7 from 743 to 736. Oil production was 8406 barrels per day for week ending 13/10/2017, a decrease from 9480 barrels per day in the previous week. This drop in oil production is because refineries were shut off during Hurricane Nate.
Donald and his plan to cut taxes just overcame its first hurdle
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 their 51 votes in 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 Canada Overnight rate, rate statement, monetary policy report—Wednesday 25 October 2017, 10pm
The expectation is for no hike in 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.
US Crude oil inventories—10.30 pm 25 October 2017 Wednesday
Another draw in inventories?
European Central Bank minimum bid rate, press conference—7.45 pm 26 October 2017 Thursday
In this ECB meeting, the expectation is for greater clarification by Mario Draghi on ECB’s future monetary policy, especially when the current QE programme is set to end in December 2017.
The details on the future monetary policy by the ECB was leaked by Reuters.
Key points from Zerohedge:
- ECB has consensus to extend asset purchases at lower volumes on Oct 26
- Agreed on reducing buys from €60 bln/month for nine months
- Debating buys between €25-40 bln, whether programme should be open-ended
- Reuters sources say no formal proposals made yet
- €25BN would be on the lower side of expectations
- Draghi defended pledge to keep rates low well past QE Thurs
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 91.7% 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.”
Short sterling is pricing in around 80+% of a rate increase by the Bank of England by December 2017, but not completely.