Some insight on NFP and Fed meeting
The Federal Reserve's meeting on Wednesday did not stirred much attention among investors, NFP is likely to face the same fate. After the natural disasters, it became clear that the US economic picture is distorted and blurred in the medium term, and the "data-dependence" rule in the Fed's policy will be temporarily unpopular.The market calmly shrugged when payrolls collapsed to -40K last month and is likely just as calmly react to the jump over 300K in October.
Why did this happen? If you look at the structure of changes in the NFP in September, the greatest decrease in employment (-127K) was in Florida, where jobs with low qualifications (restaurant industry, construction) prevail. Labor in these sectors is considered to be elastic to external shocks, i.e. quickly recover. In turn, the calculation methods of the US Department of Labor exclude the influence of short-term factors, that’s why unemployment last month fell to 4.2%.
Assuming that the labor market will compensate for declines in October and November, the significance of the NFP report will probably be lower than usual.
Now regarding the Fed. Against the backdrop of a prosperous economy and coming change of the management of the regulator, the market responded to November meeting with quite modest enthusiasm. Here are the most interesting points in wording of the statement and Yellen's speech:
According to the report, the inflation rate remains soft, but expectations for reaching the target level have not changed.
The rate of economic growth has been changed from "moderate" to "solid", despite economic damage from hurricanes. The labor market continues to grow in the Fed opinion, which could be a sign of a high employment growth in October.
Wage growth in the range of 0.2-0.3% is likely to provoke an upward spike in US dollar, as an indirect sign of improving inflationary dynamics.
The probability of the rate increase in December, the third for this year, increased to 98%.
In her speech, Yellen refrained from giving forecasts for 2018, as her powers expire in February. On Thursday, Trump will have to announce a new head of the Fed and the most likely candidate is Jeremy Powell, a proponent of gradualism in policy implementation. This also means an all-too-cautious rise in rates, sticking to data-dependence from inflation front in shaping the policy, i.e. the most dovish case of monetary policy. For the US currency, this is undoubtedly a bearish signal or at least will restrain the optimism associated with the economic recovery.
The House of Representatives is expected to present today a bill on tax reform, containing tax breaks of 6 trillion dollars for 10 years for companies and individuals. Will this be a bullish or bearish signal for the dollar depends on whether simultaneous or gradual introduction of tax breaks will be chosen. The main US stock indices are in high spirits and closed the last session in positive territory.
Forced action
The Bank of England raised the interest rate to 0.5% as an emergency measure to protect purchasing power in response to accelerating inflation. The decision was widely expected by investors largely due to the fact that the bank "threw out the white flag" at the last meeting, deciding that a bad action is better than complete inaction. Accordingly, therefore, the pound collapsed on the decision, since the bank does not have to wait for a clear continuation of the aggressive actions and the fate of the pound goes to the power of political factors, in particular Brexit. In the absence of progress on the negotiations (it is virtually non-existent), the probability is high that the pound may once again go below the level of 1.30.
Arthur Idiatulin
The Federal Reserve's meeting on Wednesday did not stirred much attention among investors, NFP is likely to face the same fate. After the natural disasters, it became clear that the US economic picture is distorted and blurred in the medium term, and the "data-dependence" rule in the Fed's policy will be temporarily unpopular.The market calmly shrugged when payrolls collapsed to -40K last month and is likely just as calmly react to the jump over 300K in October.
Why did this happen? If you look at the structure of changes in the NFP in September, the greatest decrease in employment (-127K) was in Florida, where jobs with low qualifications (restaurant industry, construction) prevail. Labor in these sectors is considered to be elastic to external shocks, i.e. quickly recover. In turn, the calculation methods of the US Department of Labor exclude the influence of short-term factors, that’s why unemployment last month fell to 4.2%.
Assuming that the labor market will compensate for declines in October and November, the significance of the NFP report will probably be lower than usual.
Now regarding the Fed. Against the backdrop of a prosperous economy and coming change of the management of the regulator, the market responded to November meeting with quite modest enthusiasm. Here are the most interesting points in wording of the statement and Yellen's speech:
According to the report, the inflation rate remains soft, but expectations for reaching the target level have not changed.
The rate of economic growth has been changed from "moderate" to "solid", despite economic damage from hurricanes. The labor market continues to grow in the Fed opinion, which could be a sign of a high employment growth in October.
Wage growth in the range of 0.2-0.3% is likely to provoke an upward spike in US dollar, as an indirect sign of improving inflationary dynamics.
The probability of the rate increase in December, the third for this year, increased to 98%.
In her speech, Yellen refrained from giving forecasts for 2018, as her powers expire in February. On Thursday, Trump will have to announce a new head of the Fed and the most likely candidate is Jeremy Powell, a proponent of gradualism in policy implementation. This also means an all-too-cautious rise in rates, sticking to data-dependence from inflation front in shaping the policy, i.e. the most dovish case of monetary policy. For the US currency, this is undoubtedly a bearish signal or at least will restrain the optimism associated with the economic recovery.
The House of Representatives is expected to present today a bill on tax reform, containing tax breaks of 6 trillion dollars for 10 years for companies and individuals. Will this be a bullish or bearish signal for the dollar depends on whether simultaneous or gradual introduction of tax breaks will be chosen. The main US stock indices are in high spirits and closed the last session in positive territory.
Forced action
The Bank of England raised the interest rate to 0.5% as an emergency measure to protect purchasing power in response to accelerating inflation. The decision was widely expected by investors largely due to the fact that the bank "threw out the white flag" at the last meeting, deciding that a bad action is better than complete inaction. Accordingly, therefore, the pound collapsed on the decision, since the bank does not have to wait for a clear continuation of the aggressive actions and the fate of the pound goes to the power of political factors, in particular Brexit. In the absence of progress on the negotiations (it is virtually non-existent), the probability is high that the pound may once again go below the level of 1.30.
Arthur Idiatulin
This analysis is provided as general market commentary and does not constitute investment advice. Past performance is not indicative of future results
