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December Decision to be Data Dependent

Fed Chair Janet Yellen Comments on Policy Outlook in Semiannual Congressional Testimony

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Calling it a ‘Live Meeting’ Fed Chair, Janet Yellen told the House Financial Services Committee that the Federal Reserve will decide in December if the US economy warrants a Fed rate hike, putting the onus back on economic data. Her comments also briefly touched upon the slowdown in the pace of hiring but noted that labour slack had significantly diminished.

UK Services Strengthen

The October reading of the UK Services PMI increased to 54.9, beating estimates of 54.6 while posting a strong increase from 53.5 previously where the PMI reading touched the lowest since April 2013. Combined with the manufacturing and construction PMIs, the October services PMI points to a robust increase which is likely to lead to stronger GDP growth in the fourth quarter. While the manufacturing and construction contributes to 14% and 6% of GDP respectively, the largest contribution comes from the services sector which amounts to 79% of GDP. In the third quarter, the preliminary estimate of UK’s GDP was seen to have expanded at 0.50%, falling below market expectations of 0.60% and down from 0.70% growth in the second quarter. EURGBP touched a new one-month low yesterday at 0.7061 as the single currency continues to remain weak on speculation of an ECB’s asset purchase expansion this December.

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ADP Payrolls Rise 182,000

The latest figures from ADP showed private payrolls in the US increasing by 182,000, beating the median estimate of 180,000. The payroll report showed that the small business hiring increased by 90,000, up from 37,000 a month ago. The construction sector added nearly 35,000 jobs, unchanged from the previous month but the services sector was weaker, adding only 158,000 jobs in October. The ADP report was followed by the US trade deficit which decreased by nearly 15% to $40.8 billion in September, less than the market estimates of $41.0 billion. August trade deficit numbers were revised lower to $48.0 billion from $43.8 billion according to the Department of Commerce. The decline in the trade deficit has managed to keep the third quarter GDP forecasts unchanged while also easing the headwinds for US economic growth. The US Dollar was well supported as a weaker NZD posted strong declines, closing at 0.6591.

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Bank of England Decision Ahead

The Bank of England will be meeting today to release a monetary policy decision. Markets are expecting the Central Bank to stand pat on policy, keeping interest rates unchanged at 0.50%. Focus will however be on rate hike speculation. As of the previous meeting, there was only one dissenter, Ian McCafferty, who voted in favor of a 25 basis point rate hike, while the remaining 8 Committee members voted unanimously to keep rates unchanged. It is unlikely to see the rate hike vote change much from last month, considering that inflation has not seen progress. Furthermore, the strong exchange rate has also been a concern that was expressed by various MPC members on previous occasions. Later, BoE Governor Mark Carney will be hosting a press conference after delivering the quarterly inflation report. The British Pound could turn volatile should the BoE decide to talk down the currency or stick to a dovish narrative.

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Fed Speak Continues

FOMC Members and regional Fed Presidents, Dennis Lockhart, William Dudley and Stanley Fischer will be hitting the wires this evening as the markets look for clues on where the voting members of the FOMC stand. William Dudley is considered to be a dove and his comments could prove to be key today. Lockhart and Fischer stand neutral on monetary policy but their thoughts are likely to be taken into consideration as well. After Yellen’s testimony yesterday, Fed Funds futures jumped 8%, with the December rate hike probability now at 58%. The markets will be looking ahead to tomorrow’s nonfarm payroll release which remains in the spotlight as speculation mounts on whether the Federal Reserve will be able to hike interest rates from current historic lows. Gold prices saw another day in negative territory, declining to $1107 per troy ounce yesterday.

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