Market Review for November 08, 2016

In China this morning, China’s trade surplus expanded in October, data from the General Administration of Customs reported Tuesday.

China’s trade surplus rose to 325 billion yuan in October, from 278.4 billion the previous month. Economists forecast the surplus to widen to 300 billion yuan.

In US-denominated terms, Beijing’s surplus widened to $49.06 billion from $42 billion in September.

Imports declined at an annualized 1.4%, continuing a multi-year downtrend that was interrupted briefly in August.

The value of exports declined at a bigger than expected 7.3% annualized rate, following a 10% drop the month before.

 Analysts expected imports to fall 1% and exports to drop 6%.

China’s trade picture has worsened in recent years on weaker demand from major markets in Europe, Asia and the United States. The downshift in China’s terms of trade reflects a broad slowdown in economic growth across both advanced and industrialized nations.

However, the world’s second-largest economy has shown signs of progress in recent months, with manufacturing activity reaching multi-year highs. Services growth has achieved similar milestones, which bodes well for Beijing’s massive plan to restructure its economy.

On Wednesday, the National Bureau of Statistics will release multiple reports on producer prices and consumer inflation. Producer inflation turned positive in September for the first time since 2012, a sign spare capacity was starting to ease. Consumer inflation also edged higher.

Moving to the US, US personal credit balances rose more than expected in September, adding to the view that consumer spending was on the rise at a critical time in the Federal Reserve’s decision-making around monetary policy.

Outstanding consumer credit, a gauge of total nonmortgage debt, increased by a seasonally adjusted $19.29 billion in September, the Federal Reserve reported Monday. A median estimate of economists forecast an increase of $18 billion. Balances spiked at a revised $26.8 billion the month before. Over the third quarter, household balance sheets rose 7%, the fastest this year.

Consumer credit has been rising steadily since late 2010, right around the time the US economy was emerging from a painful recession. Rising credit balances are usually a sign of robust consumer spending, which account for more than two-thirds of US economic activity.

The Commerce Department reported last month that personal consumption expenditures rose 0.5% in September, driven by solid gains in durable goods orders. Retail sales, another proxy for consumer spending, also rose 0.6% on the month after a revised 0.2% drop in August.

Consumers are benefiting from more plentiful jobs as the US economy nears full employment. The jobless rate ticked back down to 4.9% in October as employers added 161,000 payrolls, the Labor Department said last week. Average hourly earnings, which are used to gauge inflation, rose at an annualized 2.8% pace. That was the largest annual increase since June 2009. A stronger jobs market will likely keep consumer credit trending higher.

The Federal Reserve held off on raising interest rates last week, as officials steered clear of the upcoming presidential election. However, a consensus of market participants is confident that the Fed will resume its hiking path in December when it meets for the final time this year. The likelihood of a December rate rise is more than 76%, according to the 30-day Fed Fund futures prices, which allow investors to bet on monetary policy.

The US economy expanded at a robust 2.9% annualized rate in the third quarter, Commerce Department data showed last month. Personal consumption expenditures added 1.47 percentage points to the quarterly growth rate.

The latest Federal Reserve senior loan officer survey on bank lending standards reported that standards were basically unchanged for the commercial sector during the third quarter of 2016. There had, however, been some tightening of conditions on Commercial Real Estate (CRE) loans.

There was some increase in the maximum size of credit lines and a small decline in rate spreads, although overall changes were limited.

Demand for loans from large and medium-sized companies had declined very slightly in the latest period while demand was little changed for smaller companies. There had been a small increase in loan demand within the construction sector.

In the household sector, there was some easing of standards on loans eligible for purchase by government-sponsored enterprises while standards were little changed on balance for other categories of lending.

 There was a modest increase in demand for loans related to home purchases. There was also strong demand for auto loans and credit-card loans during the period.

Lenders reported a small decline in the likelihood of approving loans to consumers with poor credit ratings compared with the previous survey.

The Federal Reserve has been uneasy over the credit risks associated with the CRE sector and this has been a notable concern of Boston Federal Reserve President Rosengren, who dissented at the September FOMC meeting and called for an increase in interest rates.

There will be some relief that there are signs of tightening standards in the CRE sector, as this would tend to ease the risks of financial instability and excess spending, although the Fed will still be uneasy over medium-term trends.

There will still be doubts whether conditions have been tightened enough and the survey will not discourage the Fed from pushing ahead with a small rate increase at the December FOMC meeting.

The Labor Market Conditions Index (LMCI) recorded a gain of 0.7 for October following a revised decline of -0.1 the previous month, which was originally reported as a drop of 2.2.

The index has fallen in eight of the last ten months, which will maintain some underlying reservations surrounding labor-market trends, although the most recent releases will offer some net encouragement surrounding trends.

Gains in private payrolls are an important component in the index and a weaker than expected reading for October will have dragged the overall LMCI slightly lower, although this was offset by an upward revision to September’s data, which helped pull the September index to near unchanged from the original reading of -2.2. The data suggests other indicators were stronger over the month.

The LMCI was created by the Federal Reserve under the guidance of current Chair Yellen to provide a snapshot of overall conditions within the labor market. It does have a significant impact on Fed thinking with a wider range of variables than the headline payrolls data, although the overall market impact is usually very limited.

The relatively weak readings over the past few months have helped convince a majority of Fed Governors that the Fed can remain committed to a very slow pace of tightening. The subdued releases have also been important in delaying a further increase in the Fed Funds rate, but the latest release supports the case for a near-term move to tighten.

Overall, there is still a very strong probability that the Fed will move to tighten at the December FOMC meeting unless forthcoming data is extremely weak and there is an unexpected victory for Republican candidate Trump, which triggers a sharp deterioration in risk appetite.

Key points for today is Manufacturing Production (MoM) (Sep) in the UK.

Manufacturing Production measures the change in the total inflation-adjusted value of output produced by manufacturers. Manufacturing accounts for approximately 80% of overall Industrial Production.

A higher than expected reading should be taken as positive/bullish for the GBP, while a lower than expected reading should be taken as negative/bearish for the GBP.

View our full economic calendar for a daily roundup of major economic events.

 


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