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Fundamental Analysis 23.11.2017 - Market Outlook

The dollar plunged after the Federal Open Market Committee minutes showed more Committee members concerned about the low level of inflation. As I pointed out yesterday, the minutes of the September 2017 meeting showed that “some participants” were worried that there might be a new secular trend of low inflation. This time, “…many participants observed that there was some likelihood that inflation might remain below 2 percent for longer than they currently expected…” Furthermore, “many participants” observed that “continued low readings on inflation, which had occurred even as the labor market tightened, might reflect not only transitory factors, but also the influence of developments that could prove more persistent.” Meanwhile, “some other participants were concerned about upside risks to inflation…”.

In short, more participants than ever are questioning the Fed’s long-term inflation forecast, and it looks like the members with doubts are starting to outweigh the hawks.

A December 2017 rate hike is still on the cards, but when the Committee members revise their rate forecasts next month, we could see a revision to the 2018 and 2019 forecasts. Accordingly, the implied rates on Fed funds futures dropped sharply, cutting the expected future rates by about 6 bps or one quarter of a rate hike.

JPY was the main beneficiary of USD weakness, probably because USD/JPY is the most sensitive pair to US rate forecasts. With the Bank of Japan pegging JPY yields, the US-Japan yields spread is 100% a function of US, unlike other countries, whose bond yields can be pulled by the “gravitational attraction” of US yields.

It appears to me that the new Fed Chair, Jay Powell, is not likely to be more hawkish than Janet Yellen has been. Furthermore, we still haven’t heard the last from Special Counsel Robert Mueller. In short, both the monetary and political reasons to buy USD are evaporating. That could spell long-term trouble for the currency.

CAD gained on higher oil prices after Organization of the Petroleum Exporting Countries said it may invite 20 non-members to its 30 November 2017 meeting to discuss an extension of their agreement to curb output. The fact that the North American Free Trade Agreement negotiators said “progress was made” in the negotiations has also changed the outlook for CAD a bit, although note that no specifics were given on what that progress was. 

Today is the Thanksgiving Day holiday in the US, meaning all US markets will be shut. It was also Labor Thanksgiving Day in Japan. With the Japanese and US markets on holiday, we can expect relatively thin trading today. That could mean a quiet market, or it could mean more volatile moves if something big happens.

As I mentioned yesterday, the German GDP figures, which boosted the euro when the initial estimate came out, are rarely revised – today’s data is more about revealing the components of GDP rather than revising the overall figure.

Next up are the preliminary purchasing managers’ indices (PMIs) for the major EU economies  – one of the key indicators of the week. The manufacturing PMIs are forecast to be slightly lower, which probably won’t be a concern, given their relatively high levels to start with. They still indicate a robust expansion is continuing.

Also note that the EU services PMI, the purple line below, is forecast to rise slightly. That’s enough to keep the composite EU PMI unchanged. (Markit doesn’t reveal the details, but I estimate that the composite PMI is comprised of 33% manufacturing and 67% services.) I would say then that the figures should be EUR-neutral to positive. 

Britain announces the second estimate of its 3rd quarter GDP. The market usually doesn’t forecast a revision, so the forecast in today’s table is simply the provisional figure again. As you can see from the graph, it’s unusual for the second estimate to be revised.


The European Central Bank releases the “account” of its 26 October 2017 Governing Council meeting. This should make for interesting reading. Following the meeting, European Central Bank President Mario Draghi admitted that the decision with regards to the size and the duration of the bond-purchasing plan – to cut the size but set no definite ending date – wasn’t unanimous. “There were different viewpoints,” he said. “I would characterise the discussion as ranging between consensus, broad consensus on several issues and large majority on other issues.” He said a “large majority” preferred to keep the program open-ended, but that there wasn’t “consensus” on this key point. Since then, we’ve heard from several Council members who’ve said they would’ve preferred a definite ending date. I look forward to getting more insight into this debate.

Canada’s retail sales are expected to improve, even considering that the previous month was a decline. The market usually focuses on the figure excluding autos, which is forecast to be well above trend – a good sign. This is one of the more significant indicators for CAD and so I would say this figure is likely to be CAD-positive.

Swiss National Bank (SNB) President Thomas Jordan will speak at the University of Basel on the consequences of Switzerland’s high current account surplus for the SNB’s monetary policy. This should be interesting, if not market moving.

The Swiss current account surplus is certainly one of the Seven Wonders of the Financial World. According to the Organisation for Economic Co-operation and Development, the country’s currency is about 19% overvalued vs USD and 30% vs EUR, yet the current account surplus for this year is estimated at an enormous 11.25% of GDP.  How can a country whose currency is so grossly overvalued still have such a huge current account surplus? I look forward to finding out.

Switzerland certainly shows that a weak currency is not always necessary to gain an advantage in trade, although it’s not certain that what works for a small economy (8.4mn people) would work for a larger one.  

Speaking of trade, New Zealand releases its trade data on the morning of Friday 23rd November 2017 (local time). The figures aren’t seasonally adjusted, so I think it’s more useful to look at the 12-month moving average than this one month’s figure. The consensus forecast for the trade deficit would still keep the 12-month moving average on a gentle upward slope, showing an improving trade picture. That should be positive for NZD. 

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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