Fundamental Analysis 30.10.2017 - Market Outlook

USD started to weaken in late New York trading Friday 27th October 2017 on profit-taking and position closing ahead of the weekend. The move gathered speed in Asia on the morning of Monday 30th October 2017 after Trump said over the weekend that he’s likely to make an announcement about the Fed Chair this week. Expectations that he may choose Fed Gov. Jerome Powell have been weakening the dollar, because Powell would be seen as continuing Janet Yellen’s path of gradual tightening. By contrast, the other main candidate for the position, academic John Taylor, has been a consistent critic of the Fed’s loose policy and could be expected to press for a faster pace of tightening.

There has been speculation that perhaps Trump will appoint one to the Chair and the other to the Vice Chair position, a compromise that might work out well – and might boost the dollar, in my view. However, Treasury Secretary Mnuchin said the administration was focused only on the Chair appointment, not the Vice Chair. That rules out the dual appointment at least for now.

Also, it was revealed on Friday 30th October 2017 that a federal grand jury has approved the first criminal charges in special counsel Robert Mueller’s investigation of Trump presidential campaign and its ties to Russia. The indictments are sealed, meaning neither the specific charges nor the person or persons being charged aren’t known yet. Reports say that arrests could be made as early as today. The political implications could potentially be big depending on who is involved.

Over the weekend, the Spanish government began to take over Catalonia’s regional administration, starting with installing a new Chief of Police. Meanwhile, there was a report that the ECB’s Governing Council expects to end its bond purchases by the end of 2018 but not begin raising rates until Q3 2019, and even then to start with only a 15 bps move. I think the recent rally in EUR may be over for the time being.

NZD continued to feel the impact of the change in government and the new Labour government’s commitment to changing the Reserve Bank of New Zealand’s (RBNZ) mandate. Finance Minister Grant Robertson said over the weekend that reducing unemployment is a key goal of the new government and added, “we want to make sure that the objectives of the RBNZ reflect our overall view of the economy.” “Potentially” that could mean lower interest rates, he said.

The odd thing is, the money market hasn’t yet started repricing the likely course of RBNZ policy. As the graph shows, the market is still showing the same expected pace of tightening as it was before the election. In my view, NZD may be embarking on a sustained downtrend as people reevaluate the likely course of RBNZ policy.

The rise in AUD was probably a reflection of people selling NZD against it more than anything domestic in Australia. CAD gained as oil prices surged on optimism that OPEC may extend its agreement to restrain output.

Today’s market

Aside from a possible announcement by special council Mueller, the biggest thing on today’s schedule is the Bank of Japan meeting overnight. I don’t expect it to be particularly market-affecting – probably they’ll just make some minor adjustments in their forecasts.

It’s a big day for inflation figures. First in Europe we get German inflation for October 2017. As usual, the day starts with the region of Saxony. There’s no forecast, but watch the figure anyway – 80% of the time the two annual rates of change move in the same direction. The year-on-year rate of change in nationwide prices is expected to slow slightly.

UK mortgage approvals are expected to fall somewhat, another sign of the gradual downturn in UK housing. The 0.9% decline forecast for this Bank of England series is more than double the 0.4% mom fall from the UK Finance series. Since there’s about an 80% correlation between the two, there could be an upside surprise here.

Later in the day we get the US personal income and spending data, and with them the personal consumption expenditure (PCE) deflators. Both income and spending are expected to rise. Spending was apparently boosted by the hurricanes, which unfortunately destroyed a lot of cars that had to be replaced.

The PCE deflators are important because although all the attention goes on the CPI, in fact the Fed uses the core PCE deflator as its primary inflation gauge. The rate of core inflation is expected to stay the same. The yoy rate of the overall PCE deflator however is expected to accelerate by 0.3 ppt, the same as the CPI did.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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