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The Marketplace - October 30th 2014
30/10/2014
The US Dollar strengthened considerably against the Pound last night after Fed Chair Janet Yellen marked the end of the Federal Reserve's asset buying programme. The move was well received by the markets, who assumed from the accompanying remarks that an interest rate hike could be expected next year.
Following last night’s statement, the Eurozone is expected to release a raft of important economic indicators such as Germany and Spain’s consumer inflation numbers. This afternoon, Federal Reserve Chair Janet Yellen is due to speak to the board of governors at the Federal Reserve, following this month’s US unemployment claims release that could have the potential to provide further market volatility.
US Spring Rate Hike On The Cards Following Hawkish FOMC Statement
The Dollar spiked following the release of a Federal Open Market Committee statement that was viewed as hawkish in its inflation expectations and bullish outlook of the US economy.
The Fed, as expected, will conclude its asset purchase programme (QE3) this month. The debate now turns to when will be the right time to raise interest rates, which have been near zero since December 2008. Before today’s release, the market consensus was that the first increase will happen sometime in the middle of 2015.
But the tone of FOMC statement was quite optimistic. The committee said that there has been a “substantial improvement” in the outlook for the labour market since the inception of QE3, while the underutilization of labour resources is “gradually diminishing”.
Meanwhile, inflation will be held down by lower energy prices and other factors; however, the likelihood of inflation running persistently below its two-percent target has “diminished somewhat” since early this year, the FOMC said.
UK Mortgage Market Cools in September
The number of new mortgages approved in Britain fell in September to the lowest level in 14 months, the latest sign that the UK housing market is cooling. There were 61,267 new home loans approved during the month, down from 64,054 in August according to the Bank of England yesterday. New approvals have come down since January, when they hit a six-year high of 76,295. It also confirms a similar trend this year illustrated by figures released by the British Bankers' Association last week.
Total mortgage lending, net of repayments, increased by £1.8 billion, down from August and the lowest value since January, according to the Bank of England. Mortgage lending has been cooling since April, when stricter regulations for lenders came into effect to address concerns from regulators. The bank's governor, Mark Carney, said in June that real estate was the greatest risk to the domestic economy. The fact that mortgage volumes are still dipping is easing fears of rising house prices turning into an asset bubble, economists say, as it shows the market has slowed even after banks have come to grips with the new procedures.
Lending to UK businesses has also declined as loans to nonfinancial businesses fell in September by £0.7 billion, compared with a rise of £0.9 billion in August. The central bank said earlier this month that most of the lending was used by large companies who were taking advantage of record-low interest rates to refinance their debt.
Sterling failed to show any significant moves following the data as market focus remained firmly on last night’s FOMC statement.
UK Net Lending To Individuals Rises Less Than Forecast
Net lending to individuals and households in the U.K. rose less than expected in September, reflecting weaker demand for credit, official data showed on Wednesday. In a report, the Bank of England said total net lending to individuals increased by ₤2.7 billion last month, below forecasts for net lending of ₤2.8 billion and down from ₤3.2 billion in August.
Net secured lending rose by ₤1.8 billion in September, missing expectations for an increase of ₤2.1 billion, after rising by ₤2.2 billion in August. Net Lending to Individuals is correlated with consumer spending and confidence - rising debt levels are a sign that lenders feel comfortable issuing loans, and that consumers are confident in their financial position and eager to spend money
Today’s Key Data:
EUR – German Flash CPI: Prices remained flat in Germany in September, with a very moderate rise of 0.8%. While this is above the Eurozone average, it is far from convincing. The preliminary figure for October is expected to be similar.
USD – GDP: The third estimate of real gross domestic product release for the second quarter showed an annual rate expansion of 4.6%, following the previous estimate of 4.2%. The 4.6% growth in real GDP showed growing personal consumption, private inventory investment, exports, as well as local government spending. The gains were partially offset by a rise in imports, and a 0.9% decline in federal government expenditures. Personal consumption increased but the main growth force was fixed business investments expanding 9.7%. The BEA expected second quarter corporate profits increased $164.1 billion, compared to a $201.7 billion decrease in the first quarter. 3.1%. An annual growth rate of 3.1% is expected for Q3.
USD – Unemployment Claims: The number of new claims for US unemployment benefits rose by 17,000 last week to 283,000. Despite the rise, the number of claims remained below 300,000 for a sixth straight week, indicating the US job market continues to strengthen in spite of a global slowdown trend. The four-week moving average fell to its lowest level since May 2000. However, the slowdown trend in major countries is starting to impact the US manufacturing sector. The number of jobless claims is expected to decline to 277,000 this time.
USD – Janet Yellen Speaks: Federal Reserve Chair Janet Yellen will speak in Washington DC. Yellen may address the rate hike issue amid continued U.S. economic growth and strengthening in the US labour market. Likewise the Fed Chair may discuss the global slowdown trend which may affect the US economy in the coming months.
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