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US Data Bolster Case for Fed Tightening

Matt Eidinger November 29, 2018

During a week that has, once again, been overshadowed by US President Trump’s criticism of the Fed, the Personal Consumption Expenditures Index (PCE) met market expectations, rising 0.2% during October and providing more support for the view the Fed’s path toward higher interest rates is warranted.

Energy prices accounted for much of the gains on the headline figures, rising by 2.4% – identical to the CPI figures from the Bureau of Labor Statistics last month. Stripping out the volatile food and energy items, the core PCE index witnessed a monthly rise of 0.1%, or 1.8% compared to this time last year.

Headline personal income and disposable personal income each rose 0.5% last month as opposed to the expected 0.4%. Increases were widespread, with increases in proprietors’ income rebounding from the 0.8% decrease in September and rising the most (1.6%).

In other news, the Department of Labor reported seasonally-adjusted initial jobless claims rose to 234,000 during the week ending November 24th. This is slightly worse than market expectations, which were set at 220,000, but still indicative of a healthy labor market.

North of the border, Statistics Canada reported Canada’s seasonally adjusted current account deficit beat expectations, narrowing to C$10.3 billion during the third quarter of 2018, largely as a result of rises in investment income (C$2 billion) and goods and services receipts (C$3.5 billion).

Earlier this week, the Dollar index (DXY) rose to levels that were just shy of its yearly high before retreating sharply in the wake of Fed Chair Jerome Powell’s speech yesterday afternoon. Immediately after this morning’s releases, the DXY was largely unchanged and the greenback was trading in a relatively flat range against the CAD.

In contrast, the USD rose 30 bps against the EUR in the aftermath of the 8:30 releases, reversing some of yesterday’s cent-wide losses against the common currency.

Financial markets have been on edge over the course of the past few months because of the belief the US Federal Reserve had been moving too quickly to raise interest rates. Accordingly, traders had been eyeing Fed Chair Powell’s speech yesterday as an instrument to instill confidence in financial markets – which it did, toning down the Fed’s previously hawkish rhetoric and aligning it with market expectations of only one to two interest rate increases in 2019.

Overnight index swaps at the CME Group currently indicate a firm chance of a December hike (79.2%) and interest rates moving up by two quarter points by mid 2019.

Bottom Line: On the US side, despite some blow back from the president, this morning’s labor and inflation data will likely mean the Fed will stay the course and continue to raise interest rates again on December 19th, before slowing down as we move into the New Year. Canadian data indicate modest improvement in the current and financial accounts.

Matthew Eidinger
Fintech Specialist,
Dealing Operations

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