Executive Summary
A December hike is all but priced in so the market is now looking to size and timing of hikes in 2018 with a 46.3% chance of a hike at the June 2018 meeting currently priced in. The market is currently looking to inflation-related economic indicators for signs that inflation is moving back towards the Fed’s 2% target and therefore confirmation of future rate hikes post 2017.

With the unemployment rate at its lowest since February 2001 one would expect to start seeing an increase in wage pressure and inflation.

The US must be at, or at least incredibly close to full employment which means firms must be finding it difficult to hire skilled workers due to the smaller available workforce in the labour market. This was reported by some districts in October’s Beige Book.

As the economy gets closer to full employment one would expect to start seeing an increase in wage pressures though Friday’s NFP showed no growth in wages for October. It is noted that the last Beige Book did mention some districts using nonwage efforts to attract and retain workers.

In an October speech by Fed’s Williams, Williams mentioned, “What my colleagues have highlighted is that a lot of people who are at the end of their careers are retiring, and at the same time we’re pulling in a lot of younger and less experienced workers who are being paid less because they’re new to the workforce.”

The September University of Michigan’s consumer sentiment for the United States was the strongest number since January 2004 followed by the biggest gain in retail sales MoM since March 2015. Excluding motor vehicles and gasoline, sales increased 0.5 percent.

Despite all of this September’s core inflation rate was reported at a two-year low of 1.7 percent for the fifth consecutive month and September’s Core PCE came in at 1.3%, in line with expectations, which is well below the Fed’s 2% target.
We have Core CPI for October being released on the 15 November, the same day as October’s Retail Sales and Core PCE being released on the 30 November.

Current price action on Dollar Index indicates that we could see Dollar weakness as we head into that release. The low wage growth for October supports this fundamentally. I would pay very careful attention to price levels in the third week of November in treasuries and Dollar Index as a continued uptick in retail sales and an uptick in inflation data will be very well received by the market and could see a surge in the US Dollar and a selloff in US-Treasuries, Gold and the Yen. Based on recent macro data after the hurricane I am expecting a good result.

Lacklustre results would, of course, have the opposite effect and see the US Dollar continue towards the bottom of the range (last Sunday’s Dollar analysis, further analysis below for Bulls and Bears).

Based on Friday’s wage data, I will be quite surprised if we have a strong Dollar as we head into that report though this also depends on Euro and Pound Bulls after October’s ECB and BOE meetings. I will share my bias for other economies in a separate report. Also remember, we have an RBA and RBNZ meeting coming up next week.

In addition to the above, we also have to consider the market’s reaction to the appointment of Jerome Powell, the first Fed chief in four decades without an economics degree, as the new FOMC Chair and replacement of Janet Yellen in February 2018, subject to Senate approval. Forbes released a great article which you can read here if you would like to read more about Powell’s background.

Powell is a Dove and is expected to follow in Yellen’s footsteps – therefore more of the same. This may help spark the selloff in Dollar after Friday’s NFP report (I feel like that’s a stretch of the imagination though I include it anyway).

I have provided some source material below covering the most recent releases for GDP, its components, unemployment and inflation data. Pay attention to your calendars for upcoming October prints.

All the best for November. As always, comments and feedback welcome.

2. Macro
2.1. GDP Growth Rate
2.1.1 Consumer Spending
2.1.2. Business Investment
2.1.3. Government Spending
2.1.4. Balance of Trade
2.1.5. Capital Flows
2.2. Unemployment
2.3. Inflation

The statement released on 1 November 2017 holds no new information. As expected the Committee maintained the target range for the federal funds rate at 1 to 1-1/4 percent. The market was not expecting a hike at this meeting. Comments in the statement indicated that the economy has been rising at a solid state despite hurricane-related disruptions and that past experience indicates that the hurricanes are unlikely to have any material impact on where the economy is headed over the medium term.

As per previous statements, “economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.” FOMC statement

The size and timing of future rate hikes remain data dependent and the Fed continue to monitor labor market and inflation data closely. The FOMC confirmed that balance sheet normalization program initiated in October 2017 is proceeding.

2. Macro
2.1. GDP Growth Rate
The US economy expanded an annualized 3 percent on quarter in the third quarter of 2017, only slightly below 3.1 percent in the previous three months, which was the fastest pace since Q1 2015, the advance estimate showed. Figures beat expectations of 2.5 percent, despite the disruptions caused by hurricanes Harvey and Irma. Inventories rose sharply and trade made the biggest contribution to growth in nearly four years amid a fall in imports. It helped to offset a slowdown in consumer spending and fixed investment and a drop in construction. Read more

2.1.1 Consumer
The University of Michigan’s consumer sentiment for the United States was revised down to 100.7 in October of 2017 from 101.1 in the preliminary estimate and lower than market expectations of 100.9. Yet, it is still the strongest number since January 2004 amid more favorable consumers’ assessments of current economic conditions as well as expected economic prospects. Read more

Retail sales in the US rose 1.6 percent month-over-month in September of 2017, slightly below market expectations of a 1.7 percent but following a revised 0.1 percent fall in August. It is the biggest gain since March 2015 as motor vehicles sales recovered after hurricanes and higher prices boosted receipts at gasoline stations Read more

Retail Sales in the United States increased 4.40 percent in September of 2017 over the same month in the previous year. Read more

2.1.2 Business
The Institute for Supply Management’s Manufacturing PMI in the US fell to 58.7 in October of 2017 from a 13-year high of 60.8 in September. Figures came below market expectations of 59.5 as most subindexes slowed and inventories came back to contraction. Read more

The IHS Markit US Manufacturing PMI was revised slightly higher to 54.6 in October of 2017 from a preliminary of 54.5 and 53.1 in September. It is the highest reading since January due to a stronger growth in output and new orders. Also, export sales rose the most since August of 2016 and job creation was the strongest in 28 months. Read more

The ISM Non-Manufacturing PMI index for the United States increased to 60.1 in October of 2017 from 59.8 in September, beating market expectations of 58.5. It is a new high reading since August of 2005, as production, employment and inventories continued to rise and the outlook for business conditions remained positive. It is the 4th time in the whole series the number is above 60. Read more

2.1.3 Government
Government Spending in the United States decreased to 2894.40 USD Billion in the third quarter of 2017 from 2895.20 USD Billion in the second quarter of 2017. Read more

2.1.3 Balance of Trade
The trade deficit in the United States widened to USD 43.5 billion in September 2017 from an upwardly revised USD 42.8 billion in August and compared to market expectations of a USD 43.2 billion gap. Exports rose 1.1 percent to the highest since December of 2014 while imports increased at a slightly faster 1.2 percent. Read more

2.1.4. Capital Flows
Overseas investors bought USD 125 billion of US assets, including short-dated instruments in August 2017 after selling USD 7.3 billion in July. Meanwhile, foreigners bought USD 67.2 billion of long-term US securities, including government and corporate, after buying USD 1.2 billion in the previous month. Foreign investors bought USD 11.5 billion of US treasuries, after selling USD 0.5 billion in July. Read more

2.2. Labour
Non farm payrolls in the United States increased by 261 thousand in October of 2017, compared with market expectations of a 310 thousand rise. Employment in food services and drinking places increased sharply over the month, mostly offsetting a decline in September that largely reflected the impact of Hurricanes Irma and Harvey. In October, employment also increased in professional and business services, manufacturing, and health care. The September figure was revised up to an 18 thousand rise, compared to an initial estimate of a 33 thousand decline. Read more

US unemployment rate edged down by 0.1 percentage point to 4.1 percent in October, and the number of unemployed persons decreased by 281,000 to 6.5 million. Since January, the unemployment rate has declined by 0.7 percentage point, and the number of unemployed persons has decreased by 1.1 million. It is the lowest unemployment rate since February 2001. Read more

Average hourly earnings for all US employees on private nonfarm payrolls were flat at $26.53 in October of 2017, after rising by 12 cents or 0.5 percent in September. It compares with market expectations of a 0.2 percent gain and marks the first month of no growth in wages since November last year. Year-on-year, wages increased by 63 cents or 2.4 percent, below a downwardly revised 2.8 percent rise in September. In October, average hourly earnings of private-sector production and nonsupervisory employees were little changed at $22.22. Read more

2.3. Prices
US annual core inflation rate, which excludes prices of food and energy, stood at a two-year low of 1.7 percent for the fifth consecutive month in September 2017, missing market expectations of 1.8 percent. Read more

The so-called core PCE price index in the United States, which excludes food and energy, went up 0.1 percent month-over-month in September 2017, the same pace as in the previous period and in line with market expectations. Year-on-year, the core PCE price index rose 1.3 percent, the same pace as in the previous month and also in line with market consensus. Read more

US consumer prices increased 2.2 percent year-on-year in September 2017, missing market expectations of 2.3 percent and following a 1.9 percent gain in the previous month. Still it was the highest inflation rate since April, as hurricane-related production disruptions at oil refineries in the Gulf Coast area boosted energy prices. Read more

The price index for personal consumption expenditures in the United States went up 0.4 percent month-over-month in September of 2017 after an increase of 0.2 percent in August. It was the highest gain in PCE prices since January. Cost of goods advanced 0.7 percent after growing 0.3 percent in August, boosted by higher prices of nondurable goods (1.2 percent vs 0.5 percent) while the cost of durable goods fell 0.3 percent from a 0.1 percent drop in the prior month. Also, cost of services went up 0.2 percent, the same pace as in August. Year-on-year, the PCE price index went up 1.6 percent, higher than 1.4 percent in the previous month. Read more

Dollar Index Bears Eye-view Daily

Current price marks the 78.6% fib retracement of 10 July high and 8 September low. A 78.6% fib predicts a 100% retracement. The double top gets us down to MM2 as we head into the third week of November with a pullback to MPP and then down to the monthly target off soft inflation data . Note MPP would be a 38.2% fib of the double top lower low which would have a target just above MM1. Of course, if inflation data is positive then this would get price up to MM4/ MR2.

Dollar Index Bulls Eye-view Daily

A failure to move lower at the current resistance and continued strength in Dollar would see price move higher to the 161.8% fib extension which would fulfill the 38.2% retracement at MPP. Note the target off of MPP is MR2. We expect price to open at WM3 and therefore see Bears selling at market open though note Bulls could defend MPP with an aim to get price to break through resistance and head up to the monthly bullish target 161.8% fib extension/ MR2. If price breaks support at MPP and is at MM2 in time for the retail sales and inflation data reports and the results are positive as I expect they will be, then MM2 gets us up to MM4/ MR2.

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