8 Dec 2014
USD strength, ECB & Bundesbank’s forecasts will shape FX this week – BBH
FXStreet (Barcelona) - The Research Team at Brown Brothers Harriman, note that the strength of the US jobs report and cuts in growth and inflation forecasts by the European Central Bank and the Bundesbank will continue to shape developments this week.
Key Quotes
“The key takeaway from the job report is that investors are more confident that the Federal Reserve will deliver its first rate hike next year. This can be illustrated a number of ways. Consider these two. The December 2015 Fed funds futures contract implies an effective rate of 63 bp at the end of next year. This represents a 20 bp increase from the start of the week. The yield on the two-year Treasury note finished the week near 65 bp. This is a new 3.5 year high.”
“By two measures, the US employment report was among the strongest since the Great Financial Crisis. First, the monthly increase in non-farm payrolls of 321k has only been surpassed three times since the fall of Lehman. Moreover, the job growth over the past two months was revised higher by 44k. The second impressive element of the report was the 0.4% increase in average hourly earnings. This matches the best since 2009. While we prefer to allow more evidence to accumulate, some economists see the earnings data as the first sign that the improvement in the labor market has begun pushing up wages.”
“At the same time as investors appear to be getting more confident in the US economy, the ECB's staff and the Bundesbank cut growth and inflation forecasts. The estimate for next year's growth in the euro area was slashed by a third to 1.1% from 1.6%. The inflation projection was axed to 0.7% from 1.1%.”
“Draghi sees in the forecasts the urgent need to do more. Those who oppose him see the forecasts as confirmation that the risks of deflation are being exaggerated. While the situation is serious, it is not an emergency. The policy prescription is for structural reforms to lift growth potential, not buying sovereign bonds that weaken the incentives for reforms.”
“The Bundesbank essentially halved next year's growth forecast to 1% from the 1.9% it projected in June. It looks for a 1.1% increase in CPI near year rather than 1.5% it thought likely in June. Just like ECB's more pessimistic forecast did not compel a policy response, so too it would be a mistake to expect a policy response from the BBK's new forecasts.”
Key Quotes
“The key takeaway from the job report is that investors are more confident that the Federal Reserve will deliver its first rate hike next year. This can be illustrated a number of ways. Consider these two. The December 2015 Fed funds futures contract implies an effective rate of 63 bp at the end of next year. This represents a 20 bp increase from the start of the week. The yield on the two-year Treasury note finished the week near 65 bp. This is a new 3.5 year high.”
“By two measures, the US employment report was among the strongest since the Great Financial Crisis. First, the monthly increase in non-farm payrolls of 321k has only been surpassed three times since the fall of Lehman. Moreover, the job growth over the past two months was revised higher by 44k. The second impressive element of the report was the 0.4% increase in average hourly earnings. This matches the best since 2009. While we prefer to allow more evidence to accumulate, some economists see the earnings data as the first sign that the improvement in the labor market has begun pushing up wages.”
“At the same time as investors appear to be getting more confident in the US economy, the ECB's staff and the Bundesbank cut growth and inflation forecasts. The estimate for next year's growth in the euro area was slashed by a third to 1.1% from 1.6%. The inflation projection was axed to 0.7% from 1.1%.”
“Draghi sees in the forecasts the urgent need to do more. Those who oppose him see the forecasts as confirmation that the risks of deflation are being exaggerated. While the situation is serious, it is not an emergency. The policy prescription is for structural reforms to lift growth potential, not buying sovereign bonds that weaken the incentives for reforms.”
“The Bundesbank essentially halved next year's growth forecast to 1% from the 1.9% it projected in June. It looks for a 1.1% increase in CPI near year rather than 1.5% it thought likely in June. Just like ECB's more pessimistic forecast did not compel a policy response, so too it would be a mistake to expect a policy response from the BBK's new forecasts.”