Cost of carry becoming a factor
The cost of being long of the common currency finally started to take effect last week as the prospect for a rate hike in the Eurozone was pushed a long way over the horizon. It is now unlikely that the ECB will hike rates at all in 2018 and the continued economic stimulus will, in the eyes of Mario Draghi at least, continue to be necessary.
Jens Weidmann The President of the Bundesbank and the man seen most likely to replace Draghi when his term as ECB President comes to an end gave a glimpse into what can be expected from him in a stinging response to the extension of the Asset Purchase scheme.
Weidmann said “a clear end of net purchases would have been appropriate,” in a speech at the German embassy in Paris on Friday. “The development of domestic price pressures shown in projections is in line with a trajectory that will take us toward our definition of price stability.” There are mutterings that a handful of other ECB Governing Council members share Weidman’s view. In his press conference, Draghi commented that the decision was backed by a large majority of ECB members.
Sterling in focus as MPC meets
Back in June the MPC had been under pressure to consider a rate hike as projections were that inflation would rise from the 2.8% recorded in May to top 3%. As it turned out inflation fell to 2.6% and the MPC managed to “keep its powder dry”. This month Governor Mark Carney and the other members of the MPC have no such luxury. Inflation is at 3% and it is likely that the Quarterly Inflation Report, due for release this week will confirm the expectation that the top has not yet been seen.
There has been furious debate over the MPC will hike this week with macroeconomic data mixed at best despite inflation climbing. The reason for high inflation is well known as due to the continued weakness of the pound although over the past few months it has been in a, relatively, narrow range. Business investment and output have been badly affected by Brexit fears, wage inflation is close to non-existent and the gap between wages and prices is widening consequently.
It is impossible to gauge the voting intentions of the four MPC members whose position as officials of the Bank of England precludes them from being any more than vague in the pronouncements. Messrs Carney, Cunliffe,Haldane and Broadbent have been veiled in their comments although each has acknowledged, in their own way, the need for a hike “in the coming months”.
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Employment report to back FOMC decision
The Open Market Committee of the Federal Reserve will meet this week and advance guidance tells us that they will remain on hold this month with a hike coming at their next meeting on December 12-13. Benign inflation which is concerning a few FOMC members both now and going forward has been discounted by current Fed. Chair Janet Yellen who has switched her provision of advance guidance to be less data dependent and more pre-emptive recently.
The President is set to make the announcement this week on Mrs Yellen’s replacement. since having interviewed her for the post, Trump appears to have decided to take a different path. The two most likely candidates are John Taylor and Jerome Powell. Taylor has the hawkish credentials, while Powell has the experience having served on the FOMC as a Governors since 2012.
Following the FOMC decision, the market will be treated to the monthly jamboree that is the U.S. Non-Farm payrolls report. Last month 33k job were lost and any revision to that figure will provide greater interest than the October headline which is nothing more than an educated guess. Analysts expectations (which have become little more than guesses) are for 300k new jobs to have been added and a revision to +50k to September’s data. It is no surprise that those traders driven by technical factors stay well away from the market on the afternoon of the first Friday of the month!
