USD clicking on all cylinders
Today we will get US 3Q GDP read. On the balance softer retail inventories were offset by stronger wholesalers’ inventories which suggest that GDP should track near 2.8% q/q significantly above the market read of 2.6% q/q. Pending home sales were flat in September after declining to 2.8% in August due to weaker activity in areas hit by Hurricanes Harvey and Irma. Overall solid reads will reinforce the December 25bp hike and increase the likelihood that the Philip curve will kick-in. Faster growth accelerations, tighten labor markets (next week payrolls are likely to risen sharply after September weather disruptions) will rise inflation outlook closer to 2.0%. A read of this level will clearly catch the doubters flatfooted as after nearly 10 years Fed projections and hard date will have finally converged.
The repricing of the US yield curve, which has already begun, as 10-yr yield risen to 2.47%, will likely quicken. Shift higher in US rates will further rotate investors from EM and low yielding G10 into USD. EUR is especially vulnerable since the positon was extended and hope of a hawkish ECB has been significantly withdrawn as policy interest rates are unlikely to increase until 2019. In regards to the fed and policy stability, speculation is that Trump has eliminated Yellen and Warsh narrowing the field down to Powell and Taylor for Fed Chair. Given Powell’s dovish stance and long relationship with Republican stalwarts he has the highest chance of securing the post. Trump is expected to announce the decision by Nov. 3rd. we suspect this result will be viewed positively by markets as a continuation of slow and gradual monetary strategy.
ECB meeting: Very loose monetary policy continues in 2018
The ECB meeting disappointed markets as they were expecting a more hawkish stance from the ECB. Even though it was priced in that the QE would be largely extended, the bond purchase program will now be extended until next September, the amount has only been cut in half. In other words the ECB will inject 270 billion euros in the market for the first nine months of 2018. This has to be compared with the 720 billion euros that have been injected this year. The ECB current monetary policy is then going to continue to be massive. The monetary policy divergence between the US and Europe is set to widen.
The EURUSD took a hit, as markets were awaiting a stronger adjustment of the monetary policy. The pair lost almost two figures from 1.18 to 1.16 after the press conference. Draghi appeared very cautious by saying that the end of the QE would require some more time despite his optimism regarding the Eurozone recovery. The end of the QE easing is definitely not for now and markets punished the single currency. More downside on the euro appears now very likely.
