A few months ago there seemed to be this air on inevitability on the Federal Reserve’s decision to raise interest rates. It wasn’t a question of “if”, but rather “when?” Today, that inevitability is fading as traders begin to price in a 2016 hike as more likely. Yesterday, US retail sales and producer prices both missed the mark, causing the greenback to lose ground against every major currency, with EUR/USD rising to its highest level in one month. A quiet overnight session hasn’t done much to change things with nothing more than profit taking giving the big dollar a slight lift. This morning, important inflation and jobless data is on the docket before trading kicks off in North America.
Both Asian and European equities were higher overnight as markets begin to price in the prospect of more central bank easing. In an otherwise quiet session, the Japanese yen found safe haven comfort as August industrial production fell -1.2%, much more than the -0.5% dip that was expected. This is another disturbing result for output from first world countries, which continue to slow down in the wake of troubles in emerging markets, namely China. From a policy standpoint, at this stage in the game, the two big questions concern the ECB’s decision to extend QE and the Fed’s decision to delay hikes. It would appear at this moment that traders see both as likely outcomes, with share prices rising as a result. European Central Bank Nowotny sparked a bit of interest early this morning, making comments that further easing may be needed in the Euro-zone. German yields reached a two-week-low, potentially aiding the euro come off Wednesday’s one-month high. Economic data was limited during the European session following their own dip in industrial production revealed on Wednesday. It was revealed that production gains were 0.9% over the same period in 2014, well below expectations of the +1.8% advance. German economic growth projections were cut on Thursday amid the slowdown in China, as imports should continue to slide in Q4.
Today in North America, we have a lot on the docket with US inflation data, weekly jobless claims and speeches from Fed members Bullard, Dudley and Mester. The US dollar, which has been sold hard this week, will look to extend its overnight bounce with all eyes on the inflation numbers at 8:30am EST. Last month, the US experienced a -0.1% dip in prices which has created a quandary for the FOMC with respect to their “eventual” normalization process. On Wednesday, producer prices slipped -0.5%, as inflation is simply nowhere to be found at the moment. Should prices not pick up, and job gains continue to slide, it will make it very difficult for the Fed to justify any hikes, especially as earnings season is off to a rocky start. Today, Goldman Sachs and Citigroup highlight another busy slate. With the ECB meeting next week and the Fed to follow at the end of the month, it is only a matter of time we get our answers to the lingering policy questions. Weekly jobless expectations are anticipated to remain strong, with 266k forecast for the week ending October 9th.
It was also a short week for Canada as the Great White North celebrated Thanksgiving Day on Monday. The Loonie has had an up and down week, although Tuesday’s slide versus the greenback was a little less pronounced compared to previous sell-offs. Yesterday’s weaker US retail sales has some thinking the Fed could delay any rate hikes until 2016, and the Canadian dollar – for now – is one currency that is benefiting. Next Monday is Election Day in Canada, as PM Harper looks to be confirmed for another term. He is being challenged by Tom Mulcair and Justin Trudeau. As we get closer to Monday’s vote, any uncertainty could spark a slight sell-off for the CAD as the longer term trend remains higher for USDCAD.
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