Friday October 28, 2016 - 22:37:15 GMT
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Sterling Back Center-Stage
John M. Bland, MBA
Developments in the U.K. have continued to dominate trade in the latest week. A major event was House of Lords Economic Committee testimony Tuesday by Bank of England Governor Carney, who did not send the signal for a rate cut that many in the markets had been hoping for. His comments implied that an early rate cut is improbable in light of the GBP slide after the Brexit vote. He said there were limits to the central bank's ability to overlook the effect of the steep slide, about 18% since the Brexit, on inflation, and it would undoubtedly take it into account at its rate-setting meeting in the week ahead. Then on Thursday, it was reported that the initial reading on 3Q16 GDP shored an advance of 0.50% which beat street estimates for 0.3%. Yr/Yr GDP grew by 2.30% vs. 2.10% forecast. This was the first full reporting period following the the U.K. vote to leave the EU. The expansion in the economy was led by the services sector, which grew by 0.8%. The data saw the yield on the 10-yr gilt jump to 1.26% from 1.09% at last Friday's close. Sentiment about the British economy appears to be changing.
Changes in fixed income market sentiment is not confined to the U.K. Markets continue to try to reconcile the prospects for a Fed policy tightening in December with Chair Yellen's new notion of a high-pressure economy. I feel the central bank is planning to hike rates once in December before putting policy on hold for the better part of 2017. Fed Funds futures have zeroed in on roughly 70% odds (69%) on a December rate hike. It looks to me like the hawks and doves might have reached a compromise. The hawks are being granted a token December rate hike in return for the doves getting a steady monetary policy next year. Of course this "bargain" is contingent on how the economy performs over the period.
Lastly, 10-year bund yields might be finding a bottom on the belief that both the European Central Bank will hold off on further easing. While the market believes the European Central Bank will extend its asset buying beyond its March deadline, the expectation is that in December it will slow the pace of its bond purchases (QE). This realization hit the markets at about the same time as the U.K. items and saw the yiel on the 10-yr bund rise to a "lofty" 0.18% from 0.05% a week ago. Again how this evolves will be data dependent.
As can be seen below, the week ahead will be very active with several key central bank meetings scheduled along with final globa PMI readings for October. The RBA, BOJ, BOE and Fed are all epected to keep key rates steady. the major focus will be on their policy statements.
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WEEKLY HIGH IMPACT NEWS:
00:00 EZ/GB Clocks turn back one hour 31-Oct Mon
06:00 DE- Retail Sales
09:00 EZ- GDP
09:30 EZ- flash HICP
12:30 US- Core PCE Deflator
All Day EZ- Holidays
All Day final Mfg PMIs
03:00 AU- RBA Decision
All-Day Mfg PMIs
03:00 JP- Bank of Japan Decision
7:55 DE- Employment
12:15 US- ADP Private Employment
14:30 US- EIA Crude
18:00 US- FOMC Decision
00:00 JP- Holiday
All Day Service PMIs
11:00 GB- Bank of England Decision
12:30 US- Productivity
12:30 US- Weekly Jobless
All Day Service PMIs
12:30 US- Jobs/Trade
12:30 CA- Jobs/Trade
Be sure to refer daily Global-View to see the continuously UPDATED Economic Calendar and the Forex Forum for the complete list of key items (actual data, selected charts, etc.) as they are released.
John M. Bland
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