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December Rate Hike Speculation Climbs Further

Rising Odds of Action at Federal Reserve’s Next Meeting Sends Dollar Soaring

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With market fear turning into optimism following the election of Donald Trump, investor sentiment towards the US policy outlook is rapidly turning more hawkish.  A rising probability of action has sustained upside momentum in the US dollar as climbing risk assets reduce the advantage of holding haven assets.

Dollar Opens the Week Higher


In another sign that last week’s momentum higher in risk assets is set for continuation, the strength in US dollar and equities has endured since the weekly market reopening.  The tailwinds for the US dollar and equities are partially attributed to the increasing likelihood of a rate hike from the Federal Reserve in December.  According to closing prices from Friday, Fed Funds futures, which track the probability of policy actions, signaled an 81.10% chance of a 0.25% step higher in rates from the current 0.50% to 0.75%.  The other driver of momentum has been Trump’s ambitious fiscal plans which include greater infrastructure stimulus and tax cuts for individuals and corporations that are expected to directly benefit economic activity and inflation.  EURUSD remains under pressure as European policymakers react to the election results with panic after calling an EU emergency meeting over the weekend.

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Japanese GDP Expansion Accelerates


After weeks of concern following revisions to the Bank of Japan’s timeline for reaching the 2.00% inflation target, data released overnight showed that the economy is outperforming the consensus estimates of economists and analysts.  The advance readings of gross domestic product for the third quarter managed to beat expectations by a wide margin thanks to stronger exports and domestic demand.  On an annualized basis, headline GDP grew at a 2.20% pace compared to the 0.90% forecast and the 0.70% reported a period prior.  Quarterly GDP expanded by 0.50%, beating expectations of 0.20%.  During the period, exports climbed by 2.00% while imports fell by 0.60%, marking the fourth-straight quarter of declines.  Despite positive headline data and optimism from strengthening industrial production, capacity utilization figures showed manufacturing and industrial activity may actually be shrinking.  In the meantime, the USDJPY continues to climb, rising to the highest levels since June.

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Chinese Industrial Production Holds Steady


As the US dollar climbs to a 9-month high, the Yuan continues to fall, reaching the lowest level versus the US currency in 7-years as the People’s Bank of China responds to tepid growth with intervention in exchange rates.  Despite lingering concerns about the pace of economic activity on the mainland, industrial production managed to stay firmly in growth territory, printing at 6.10% during October and matching September’s figures.  Along with retail sales which decelerated to 10.00% growth year over year through October from the 10.70% reported a month ago, there was some cautiousness towards the outlook.  While upgraded fixed asset investment was a silver lining, the latest data underlines the challenges facing Chinese officials as they attempt to mix highly accommodative monetary policy with more fiscal stimulus to keep growth elevated.

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Rising Global Production Forces Oil Prices Lower


Despite a flurry of chatter relating to a proposed production freeze, major oil producers continue to expand output as evidenced by the latest data.  With the semiannual Vienna meeting of OPEC members rapidly approaching, growing supply threatens to derail any agreement.  Recent data shows that OPEC output rose to 33.640 million barrels per day in October.  However, non-OPEC producers are also increasing production, with Russia, Brazil, Canada, and the United States adding to the prevailing supply imbalance.  In the US alone, oil production rose by 2.00% according to the latest EIA data accompanied by a rising drill rig count.  Furthermore, with European onshore storage almost full, another catalyst for downside pressure in oil prices has emerged.  WTI crude oil futures are currently trending near the lowest levels since September amid the diminished viability of a deal being formed among OPEC and non-OPEC producers.

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