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Will Fed Start Hiking Within Less Than 6 Weeks?

Will Fed Start Hiking Within Less Than 6 Weeks?
(Dollar Photo Club)

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Monday, 02 November 2015 07:27 AM Current | Bio | Archive

Because global growth depends on a huge part on how the Chinese economy is performing, investors could still do well continuing to pay attention to how the Chinese industry is performing as it is still challenged by overcapacity, falling demand and structural issues.

Unfortunately, the just released data are not encouraging. China’s “official” services PMI, provided by the National Bureau of Statistics (NBS), slowed down to a near 7-year low (peaked at 62.2 in May 2007) coming in at 53.1 while the “private” Caixin China General Manufacturing PMI showed operating conditions continued to deteriorate for the 8th month in a row, albeit at a somewhat slower pace, in October coming in at 48.3.

Caixin commented, “Weak aggregate demand remained the biggest obstacle to economic growth, and the risk of deflation resulting from the continued fall in the prices of bulk commodities needs attention.”

That said, the Financial Times informed the eurozone central bankers, struggling to boost the single currency area’s flagging recovery, have received help from Beijing in delivering their 1.1 trillion euro quantitative easing plan thanks to sales of German government debt by the People’s Bank of China (PBOC) and thereby helped easing “concerns over the whether the Bundesbank ... could find enough German bonds to buy have long surrounded the program … a potentially problematic amount due to low levels of debt issuance by the German state.”

We could say, so far, so good as the Chinese State Administration of Foreign Exchange (SAFE) who is thought to hold hundreds of billions of euros of eurozone government debt, would at this moment in time make profits by selling their German government bonds, but, and here comes the problem, any of these Chinese gains on their euro bonds could be whipped out by a further weakening of the euro (Morgan Stanley just cut its forecast of the euro/dollar pair to $1.06 per euro for 2015, down from $1.13; and to $1.03 per euro for 2016, down from $1.11) and logically, the Chinese would be "tempted" to stockpile dollars once again further down the road, which would put further upward (unwelcome!) pressure on the dollar, if that were to occur.

We should also not overlook the fact the ECB is expected to lose further its monetary stance on December 3rd and if the Fed starts hiking, albeit by a very small percentage, on December 16th, the dollar will have no other way to go than to strengthen further and Goldman Sachs’ recent forecast the dollar may rise to parity with the euro by year end could become reality.

In this context, we got the latest Markit Eurozone Manufacturing PMIs on which the Chief Economist at Markit Chris Williamson commented: “The eurozone manufacturing recovery remains disappointingly insipid. The October survey is signaling factory output growth of only 2 per cent per annum, a lackluster performance given the amount of ECB stimulus that was put in place.”

Factory production is lacking vigor, employment growth continues sagging with unemployment still at 10.8 percent and annual inflation for the eurozone as a whole at 0.0 percent, it’s easy to see why the ECB is considering additional stimulus.”

So, for all investors the key question remains will the Fed start hiking within less than 6 weeks.

As expected, on Friday U.S. Congress removed an important obstacle for a December Fed rate hike by passing a two-year budget plan that avoids a government default and a shutdown.

Looking at what the markets are telling us at present about the probability of a Fed rate hike in December it’s certainly important to take notice on Friday we saw the 2-year U.S. Treasury closing at its highest yield since April 2011 at 0.75 percent, which generally spoken “should” imply, if nothing dramatic happens, a Fed rate hike in December.

Using the CME “FedWatch Tool,” which is based on the Chicago Mercantile Exchange (CME) Group 30-Day Fed Fund futures prices indicated on Friday there is now a 47 percent probability we’ll have a rate hike on December 16.

Finally, we’ll have to wait and see if we learn something new from what Fed Chair Janet Yellen says at the Financial Oversight Council or what she will say on Wednesday at the House Financial Services Committee.

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HansParisis
We’ll have to wait and see if we learn something new from what Fed Chair Janet Yellen says at the Financial Oversight Council or what she will say on Wednesday at the House Financial Services Committee.
fed, rate, investors, economy
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2015-27-02
Monday, 02 November 2015 07:27 AM
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