October ISM New York Index Little Changed At 49.2, Employment Stabilises
The New York ISM business activity index edged slightly lower to
49.2 for October from 49.6 the previous month, while the six-month
outlook was also weaker at 56.9 from 59.6 previously.
The quantity of purchases index declined to 44.3 from 47.1, while
current revenues fell slightly to 51.4 from 51.6. In contrast, the index
for expected revenues strengthened to 60.3 from 56.7 and was the
highest reading for three months.
After the very sharp decline in the employment index in the September
reading, there was a recovery to 50.6 in October from 33.9. Many more
companies were somewhat likely to increase jobs over the next six months
than in the previous survey, which underpinned the component. The
employment index also strengthened from the level last year, which
suggests last month’s reading was an outlier.
The prices paid index declined to 55.6 from 60.3, although this
remained well above the 2016 average and above the October 2015 level.
The data overall does not provide any great insights into the
outlook, but there will be relief that the employment index recovered
strongly on the month and the overall trend suggests moderate economic
growth is continuing. Importantly, the index remains comfortably above
the levels seen in the second quarter of 2016.
Trump worries hand dollar worst week in 12, jobs data eyed
The dollar inched up from a four-week low on Friday ahead of the U.S.
non-farm payrolls report later in the day but was on track for its
worst week in 12, pressured by worries that Donald Trump could win next
week's U.S. presidential election.
The greenback has fallen 1.2 percent this week against a basket of major currencies (DXY)
as Democrat Hillary Clinton's lead over Republican rival Trump in polls
has dwindled following the re-emergence of a controversy over her
private email server.
The U.S. currency had hit a nine-month high
last week as investors bet that the Federal Reserve would hike interest
rates later this year, but a Trump victory is seen delaying that hike.
Clinton is viewed as a candidate of the status quo, while much
uncertainty surrounds Trump's stance on key issues including foreign
policy, trade and the economy.
"No doubt investors will retain a
cautious stance today, fearful of fresh polls," said ING currency
strategist Chris Turner, in London. "Where macro does play a role in
today's proceedings, we believe it should be dollar-positive."
polled by Reuters forecast non-farm employment to have risen by 175,000
in October from 156,000 in September, in data due at 1230 GMT . An
upbeat jobs report is expected to bolster bets on a December rate hike,
which would typically push U.S. yields higher and support the greenback.
Turner said it would take a headline number of
below 75,000 to seriously challenge the market's conviction of a Fed
hike in December, and therefore to knock the dollar.
have trumped economics in foreign exchange markets in recent weeks.
Investors are focused on the Nov. 8 election and have paid scant
attention to what would normally be key events such as the Fed's policy
decision earlier this week.
"The market is likely to greet a
strong payrolls report with a straightforward enough response and bid
the dollar higher," said Junichi Ishikawa, senior FX strategist at IG
Securities in Tokyo. "But the rise could fade quickly amid the 'Trump
Now that the Federal Reserve’s monetary policy meeting and U.S. nonfarm payrolls reports are behind us, investors can focus solely on Tuesday’s U.S. presidential election. Friday’s U.S. jobs report failed to change the market’s expectations for a rate hike in December. A total of 161K jobs were created in October but September job growth was revised higher, the unemployment rate dropped back below 4.9% and average hourly earnings rose 0.4%, which was more than expected. But the only thing that matters next week is who becomes the next president of the United States. Economics and monetary policy will take a back seat to the unfolding political drama, especially since there are no major U.S. economic reports on the calendar. Over the past 2 weeks we have gotten a taste of how equities and currencies could trade if Donald Trump becomes president. On November 1, when a poll suggested that Trump led Clinton by 1 point, the Dollar Index dropped 1%, the Mexican peso fell 1.75% and the Swiss franc soared 1.4%. Investors took the U.S. dollar lower against all of the major currencies as the race tightened and the polling gap between Donald Trump and Hillary Clinton closed. As shown in the chart below, USD/JPY has been taking its cue from Real Clear Politics’ 2016 Presidential Poll Average Value for Hillary Clinton (white line) – a similar relationship can be seen with the dollar index. Over the past 3 months, when Clinton’s popularity rose the U.S. dollar strengthened and when it fell (like it has recently), USD/JPY crashes.
U.S. elections don’t normally elicit major market volatility but the problem in 2016 is that for the better part of this year, market participants did not consider a Trump victory realistic, and now that the election is too close to call, they are bailing out of U.S. assets and rushing to protect their portfolios. Regardless of your political leanings, it is hard to ignore the fact that investors fear a Trump Presidency. His foreign policy, trade ideas and plan to overhaul the Federal Reserve scare domestic and foreign investors alike and the general lack of specificity could mean a long period of uncertainty. Beyond the immediate impact, investors also worry that if markets sell-off and the U.S. economy slows, the Fed could forgo a rate hike in December, which would exacerbate the dollar's slide through year's end.
But what if Hillary Clinton makes history by becoming the first female president of the United States? The market’s reaction depends on the margin of her victory.
The latest Mortgage Bankers Association (MBA) data recorded a 1.2%
decline in the week ending November 4th, the same decline as had been
reported the previous week. Yield trends will be a key short-term factor
for mortgage applications as uncertainty increases.
Applications for home purchase increased 1.0% on the week and there was an 11.0% gain from the same week in 2015.
Re-mortgage applications declined 3.0% on the week and were at the lowest level since May.
Mortgage rates will continue to be watched closely in the short term
with 30-year fixed rates rising to 3.77% in the latest week from 3.75%
previously. This was the fifth consecutive weekly increase and the
highest level since June.
Longer-term yields have continued to move higher over the past week
and mortgage rates will also tend to move higher in the short term.
The Presidential election and Trump’s victory has introduced a
further high degree of uncertainty surrounding the outlook. There will
be doubts surrounding the economic outlook following the election
result, which will potentially undermine confidence in the housing
The trend in US yields will also be watched very closely in the short
term. There has been very choppy trading in bonds following the
election result with prices declining sharply after securing initial
gains. Overall, there has been upward pressure on yields with 30-year
rates close to 2.75% ahead of the US open.
US Federal Budget Deficit $44.2bn For October, Trump Plans Under Scrutiny
The US Federal budget recorded a deficit of $44.19bn for October
compared with a deficit of $136.6bn the previous year. Receipts rose
5.0% over the year while there was a sharp decline in spending of over
18%, although this was distorted by calendar effects and the impact of
When adjusted for calendar effects, there was an October deficit of $84bn from $88bn the previous year.
Income tax receipts rose by 11% over the year, but there was a sharp
decline in corporate tax receipts. There are major problems in
extrapolating from monthly data, but there has been a consistent pattern
of weak corporate tax receipts throughout the last year.
For fiscal 2016, the deficit amounted to $587.3bn, equivalent to 3.2%
of GDP, an increase from 2.5% of GDP the previous year, the first
increase in terms of GDP since 2009.
The Congressional Budget Office (CBO) is currently projecting a
deficit of $594bn for fiscal 2017, although there is a very strong
probability that there will be changes to fiscal policy under the new
Administration, which will force major changes to the forecasts.
Fiscal policy has received only limited attention over the past few
months, especially with effective gridlock between the Administration
and Congress, but the budget will be a much bigger focus over the next
few months and is likely to have a substantial market impact.
Dollar Extends Gains But Resistance Nears For Many Pairs
Investors continued to buy U.S. dollars Thursday, 48 hours after the 2016 Presidential election. We didn’t get a chance to share our views Wednesday because we were busy trading election night and the day after but there’s no doubt that the outcome was a big surprise. It sparked widespread volatility and short covering in the financial markets but when the dust settled, the U.S. dollar and U.S. stocks recovered all of their steep losses. Instead of mourning, investors cheered a Trump victory as they hoped he will be positive for the economy. He ran on a campaign of aggressive spending and this is the first time in 8 years that there’s the prospect of a sizeable fiscal stimulus package. His victory speech was conciliatory and heavily Keynesian, which went a long way in boosting risk appetite and lifting Treasury yields. Perhaps feeling the weight of his new responsibilities, Trump is toning down his abrasiveness and opening his ears to outside counsel and advice. He may not have a specific plan for creating new jobs, offsetting the tax cuts he plans or finding the money for infrastructure spending outside of ballooning the deficit, but the mere promise of a fiscal stimulus program at a time when the Federal Reserve is preparing to raise interest rates reinvigorated hope for a new cycle of growth.
The odds for a rate hike after the election hasn’t changed and in fact increased from 80% to 84% according to Fed Fund futures. This is not a big surprise because stocks recovered strongly. Had they fallen 500 or 600 points on Wednesday, the Fed would most certainly reconsider its plans for tightening. Instead, with the Dow Jones Industrial Average at a record high, Janet Yellen has an even stronger case to boost rates in December. It would be her last decision before President Trump can pressure the central bank and the move would show that she isn’t buckling on future political pressure. Data was also good with jobless claims falling 11k. Weekly claims have remained below 300K for 88 weeks, the longest stretch in more than 45 years. The University of Michigan consumer sentiment index is scheduled for release Friday and a steady reading is expected. Meanwhile, it is important to recognize that rising U.S. yields are the primary reason for the dollar’s strength. Ten-year Treasury yields rose above 2% on Wednesday, taking USD/JPY above 105 and Thursday’s extension in rates drove the pair within 5 pips of 107. There’s no question that USD/JPY is overbought, but we could see the pair break 107 before the rally finally fizzles. Of course, it could also stall here, right at the 200-day SMA and 38.2% Fibonacci retracement of the 2011 to 2015 rally.
November University of Michigan Consumer Confidence Strengthens To 91.6, Inflation Expectations Rise
The US University of Michigan consumer confidence index strengthened
to a preliminary 91.6 for November from 87.2 the previous month. This
was the highest reading since July and also above consensus expectations
of a figure around 87.5.
The current conditions index strengthened to 105.9 from 103.2 to give
a 1.5% gain over the year, while the expectations index advanced to
82.5 from 76.8, although there was a slight decline over the year.
According to the survey, overall confidence in the outlook for the
economy improved and readings of this level are consistent with annual
GDP growth of around 2.5%. The overall survey reading was just above the
Significantly, there was an increase in inflation expectations in the
data with both the 1-year and 5-year expected rates increasing to 2.7%
from 2.4% the previous month. The increase may not be significant, but
does suggest that inflation expectations have bottomed out.
This is potentially very important given that the Fed has been
concerned that inflation expectations have been declining to dangerously
low levels and this has been a major barrier to raising interest rates.
The data was collected before the US Presidential election and there will be some caution over potential near-term trends.