31 October, 2016
After the U.S. and U.K. economies showed better than expected growth in the third quarter, investors turn their attention to monetary policy actions. Four major central banks will meet the coming week (Fed, BoE, BoJ, and RBA), and while most of them remaining accommodative or planning to ease further, only the Federal Reserve is set to swim against the tide. Here’s what to watch the week ahead:
The Fed to send a clear message
With 9 days remaining to the U.S. presidential election, the Fed is expected to keep markets calm and stand pat on rates when they announce policy on Wednesday. The two-day meeting will most likely set the tone for December where markets are pricing more than 70% chance for a hike.
Latest round of economic releases supports the idea of tightening policy with growth bouncing back from a weak first half in 2016, jobs added to the economy averaging at 191,000 in the last three months, and more Americans buying new homes. The improvement in data will likely keep the dissenters from October’s decision in favor of hiking, but I think it’s very unlikely for other members to join.
I believe the statement that follows the meeting will indicate a clear signal that a rate hike in December is coming, similarly to what we saw in October 2015 when the Fed stated “In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress both realized and expected toward its objectives of maximum employment and 2 percent inflation.”
Another strong jobs report to support Fed’s view
Several U.S. economic reports are due next week including personal consumption expenditure, ISM manufacturing and non-manufacturing, factory orders and trade balance, but Friday’s jobs report will have the most significant impact on markets. The economy is expected to add 175,000 jobs in October versus 156,000 in September, and unemployment to tick down to 4.9% from 5%. Wages are no less important with average hourly earnings expected to climb to 2.6% from a year ago suggesting that inflation will return sooner than later.
Earning season remains in full swing
Earnings season will continue with heavyweight companies to announce results including Facebook, Alibaba, Starbucks, Pfizer, Time Warner, Qualcomm, and Warren Buffett’s Berkshire Hathaway. So far 74% of S&P 500 companies managed to beat profit estimates while 58% beat on revenues, and it became clear that U.S. companies are out of profit recession which lasted 5 quarters with earning growth for S&P now standing at 1.6% according to Factset.
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