Rift in hard and soft economic data
Ø Retail sales below forecast and downward revision
Ø Industrial production underwhelming
Ø Empire state and Michigan guiding you towards a ditch
The rift continues between the soft data and hard data over in the US. Last week, we have seen more evidence of this in the economic numbers and it is about time for the Fed to start paying attention to this. They are going to embark on the process of unwinding their balance sheet and at the same time continue their glide path to normalise the interest rate.
The hard economic numbers have been coming in underwhelming since April. Last week’s industrial and retail sales number reminded the markets of the same message. If you look at the Empire State Manufacturing and the university of Michigan Consumer Sentiment numbers, it tells you that the soft data is navigating investors towards a ditch. What is important to keep in mind is that your hard data is something which is the engine that drives the economic growth.
Fed’s Plan For Four More Interest Rate Hikes To Face Serious Headwinds
Ø The economic growth is going to remain sluggish
Ø Catastrophes caused from the hurricanes are becoming prominent in the economic data; the US factory output declined in August due to the curtailing of the refinery operations and chemical production
Ø The US consumer sentiment dipped as investors have shown their anxieties growing due to the hurricane
Ø The Atlanta Fed’s GDPNow index has reduced its economic growth target for the third quarter from 2.29% to s.s25%
Ø The New York Fed’s GDP forecast has taken the same route, and he expect the GDP to grow at 1.34% a much lower number from the previous reading of 0.3%
Sterling Bullish Due to Three Main Reasons
Ø The BoE may increase interest rate; the dovish voters are turning hawkish- November meeting could be a live meeting
Ø The Dollar weakness is a factor
Ø The Sterling weakness improved trade balance and has hence an effect on the economy
The critical aspect due to which we do not support the strength in the sterling is that the Brexit negotiations are heavily ignored. We have literally no progress and the negotiations process is chocking itself.
The weakness in the consumer spending is largely being ignored. The wage growth is abate and rising inflation is making consumers to tighten their belt even further which is a recipe for a disaster.
ECB Ready
The ECB is expected to make an announcement this week about reinvesting an average of 15 billion euros a month from maturing debt holdings. This would have a twofold impact; firstly, it would soften the blow on the Eurozone’s economic growth when the ECB will start its monetary policy tapering process. And finally, it would send a clear signal for the euro traders that the tapering process is going to become reality now and that could see more upward movement for the euro-dollar pair.