Dollar Softer While Consolidation Continues

The US dollar has slipped lower against the major currencies and is mixed against the emerging market currencies.  Still, the consolidative tone seen since the start of the week has continued.  There seems to be a technical component here, but after a big push higher, US rates have also eased.  

News yesterday that nine of the 12 regional Federal Reserve banks called for a discount rate hike last month.  The regional Federal Reserve  branches make an non-binding recommendation to the Board of Governors.    The Atlanta Fed became the news convert to the cause.  This is the highest number requesting that the discount rate be lifted from 1.0% to 1.25% since last December.  The Board obviously did not acquiesce, however, it is indicative of the mood.  

The three regional Fed branches that did go with the majority are interesting in their own right.  NY, which is understandable in our framework that sees Dudley as part of the core Fed leadership that drives policy.  Chicago is not much of a surprise.  Evans is among the leading doves.  The Minneapolis Fed may be the most surprising, but Kashkari has taken a dovish line.  

Recall that the September dot plots showed three officials thinking that a rate hike this year would not be appropriate.  At the time, many, including ourselves, suspected Governors Brainard and/or Tarullo were  among those outliers.  It appeared that Yellen had to chose between dissents from the Governors if the Fed hiked or dissents from regional Fed presidents if it stood pat.  However, with the discount rate minutes, there are other scenarios that ought to be considered, and in any event, will likely prevent the odds of a December hike unwind too far ahead of the jobs data early next month. 

There have been two economic reports that investors are digesting now.  First came from China.  The world's second largest economy expanded by 1.8% in Q3 for a 6.7%  year-over-year pace.  It is spot on expectations and is the third quarter at this reported pace.  The GDP estimate sapped the interest from the September industrial output (6.1% vs 6.3% in August) and retail sales (10.7% vs 10.6% in August).   

Perhaps the real takeaway from both the Chinese data and the fact that the dollar is holding above what was previously believed to have been the dollar's cap (~CNY6.7) is that there is not a takeaway.  In August 2015 and again at the start of this year, the global capital markets appeared to be driven by events in China.  This has ceased to be the case.  It is not the focus or linkages cannot be reestablished, but rather it is to appreciate that events in Beijing are not among the key drivers now.  

The second economic report was UK employment.  It was unremarkable and not significant, though for the record, the claimant count edged seven hundred higher, a little more than a quarter of what economists expected.  The ILO unemployment rate was flat at 4.9%, an 11-year low.  

Overall earnings growth slowed slightly to 2.3% from a revised 2.4%, though excluding bonuses, the 2.3% pace was a tad higher than 2.2% previously.  With inflation rising, as the CPI showed yesterday, real earnings are softening and will continue to do so.   Over time, this will likely soften household demand.  

News that Monte dei Paschi will likely get its board approval next week for its capital raising and sale of a portfolio of bad loans is helping to lift Italian bank shares today, and extending the rally into the fourth sessions.  Deutsche Bank shares are trading slightly lower, though still on pace to record its third weekly gain.  Overall though European financials are underperforming the market today.  

The North American session features the Bank of Canada meeting, US housing starts and the Fed's Beige Book (ahead of the early November FOMC meeting).  The Bank of Canada is not expected to change policy, but downward revisions in its economic forecasts and pushing further out when the output gap is projected to close will likely give a dovish cast to the stand pat policy.  The market appears to be pricing in steady policy next year.   

Bloomberg's calculation puts the odds of a November Fed hike at 17.1% and December at 53.2%. Like our interpolation, the CME estimates the odds at 8.3% for November and 60% for December.   Neither the housing starts nor the Beige Book will likely change this materially.   

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