- US Chicago Fed National Activity Index expected to rebound in October
- Treasury yields look set to continue rising this week
- EURUSD’s slide appears to have momentum
Today’s update of the Chicago Fed National Activity Index will probably show that US economic activity picked up in October. Meanwhile, the recent pop in Treasury yields is poised to roll on this week while EUR/USD looks vulnerable to further weakness.
US: Chicago Fed National Activity Index (1330 GMT): Last week’s economic releases paint an upbeat profile of the US macro trend through October and today’s update of the Chicago Fed National Activity Index will probably reaffirm that recession risk is low and the near-term outlook continues to skew positive.
Indeed, retail spending last month jumped 0.8%, which follows an even bigger increase in September. The combined 1.8% advance for the past two months marks the strongest back-to-back rise in more than two years. Meanwhile, last week's news that jobless claims fell in the second week of November to the lowest level since 1973 suggests that the labour market will continue to expand at a healthy pace.
The weak link in the economy is industrial production, which was flat in October. On the other hand, the manufacturing component – the biggest slice of industrial output – gained a modest 0.2% for the second month in a row.
Overall, a moderate tail wind continues to support the US macro trend. The latest results have lifted the Atlanta Fed’s nowcast for third-quarter GDP to a solid 3.6% increase (seasonally adjusted annual rate). If accurate, the gain will be the strongest quarterly growth rate in more than two years.
Today’s October report from the Chicago Fed will likely restate the case for expecting moderate growth to roll on. My econometric modeling suggests as much and TradingEconomics.com is projecting a firmer round of data as well.
The estimate calls for a solid rebound in the monthly reading of the index to 0.18, a three-month high. If correct, the gain will lift the index's three-month moving average and widen the margin of comfort over the negative 0.70 line that marks recessionary territory.
US: 2-Year Treasury Yield: The market is now pricing in a rate hike next month as a near-certain event – a 95% probability, based on Fed funds futures, according to CME data on Friday. The question for the week ahead is whether the policy sensitive 2-year Treasury yield will deliver an even stronger forecast that higher rates are due for the December 13-14 Federal Open Market Committee meeting.
The post-election bounce in the 2-year yield already reflects growing confidence that the Federal Reserve is committed to pulling the trigger. This widely followed maturity, which is considered a benchmark for rate expectations, advanced to 1.07% at the end of last week, the highest so far this year, based on daily data via Treasury.gov. If the 2-year yield climbs further, the move will mark an even stronger signal that another rate hike next month is thought to be all but certain.
Fed Chair Janet Yellen hinted at no less in testimony to Congress last week. “At our meeting earlier this month, the Committee judged that the case for an increase in the target range had continued to strengthen and that such an increase could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the Committee's objectives,” she said in a prepared statement.
By that standard, the odds for a rate hike are rising, given what we learned last week in several economic releases, as noted above. Short of unusually dark numbers in this week’s scheduled releases, the 2-year yield looks poised to tick higher in the days ahead.
EUR/USD: Rising expectations for a US rate hike, combined with firmer numbers for the US economy, are weighing on the euro. The single currency fell more than 2.5% last week vs. the US dollar and analysts are forecasting that the weakness will continue.
Adding to the dollar’s bullish trend is the outlook that the incoming Trump administration will deploy a robust fiscal stimulus to boost economic growth.
“The US used to have some monetary policy divergence with the rest of the world, now we also have fiscal policy divergence, which should be very beneficial to the dollar,” noted the head of currencies at Fischer Francis Trees & Watts, a New York money manager.
Price momentum certainly endorses that prediction. EUR/USD is now trading far below key moving averages. Meanwhile, the 50-day average has sunk well below its 100- and 200-day counterparts, which suggests that the euro’s downside risk remains significant.
It doesn’t help to learn that Now-Casting.com’s projections for fourth-quarter GDP growth in the Eurozone has retreated in recent weeks. Although Friday’s projection for a 0.49% quarterly increase still marks an improvement over the 0.3% rise in Q2, the US expansion’s expected acceleration is even stronger and has ticked up lately.
President-elect Trump’s plans for “fiscal stimulus and tax cuts could boost domestic growth and generate significant inflation pressures,” according to ING Financial Markets. Higher Treasury yields only sweeten the deal for holding greenbacks.
Until or if the crowd becomes convinced otherwise, the dollar is on track to strengthen further against the euro.
Disclosure: Originally published at Saxo Bank TradingFloor.com