• Fed Chair Yellen: December rate hike a “live possibility” Fed Chair Janet Yellen said in her testimony before the House Financial Service Committee that if the upcoming US data support further improvement in the labor market and the return of inflation to the 2% target, the December rate hike would be a live possibility. Even though the tone of the speech was similar to the FOMC October meeting statement, this was Yellen’s first direct communication with the market. The fact that she supported the case of a liftoff bolstered expectations for higher interest rates and strengthened the greenback across the board. Investors raised their expectations of a December rate hike to around 60% from near 35% before the October FOMC meeting. In addition to Chair Yellen, New York Fed President William Dudley said later on Wednesday that he would "completely agree" with Yellen that December "is a live possibility”, but the decision will depend on the data.
• We maintain our focus on the October employment report, the minutes of the FOMC October meeting and on any Fed speakers going into the December meeting for more insights about officials’ view over the outlook of the US economy. It has become very clear that the decision on whether to start normalization this year is data-driven. Therefore, positive US data surprises are now required for the market to re-price expectations and USD to gain further.
• The highlight of the day will be the Bank of England monetary policy meeting. This is the second “Super Thursday” as the Bank simultaneously releases its meeting decision, the meeting minutes and the quarterly Inflation Report. The consensus is that the vote will once again be split 8-1 with Ian McCafferty to maintain his call for a rate rise. Market participants will be eager to see if McCafferty is joined by the formerly hawkish Martin Weale or Kristin Forbes, who argued that the underlying inflation should start to pick up soon and that monetary policy would need to be tightened sooner. In the Inflation Report, Bank officials could lower their near-term GDP growth and CPI forecasts given the lower than expected preliminary GDP for Q3 and near zero inflation for most of this year. As a result, the impact on GBP will highly depend on the extent of the revision and on the tone of the meeting minutes.
• Besides the BoE, the Norges Bank decides on its interest rates as well. Norway’s neighbors are once again in an easing mood putting pressure on Norges Bank to follow suit. However, since the September rate cut was justified as a precautionary move, we believe that the Bank will refrain from acting now as it seems to be one step ahead. What is more, NOK has declined more than the Bank forecasted in September, which supports our view for no action at this meeting.
• As for the indicators, Germany’s factory orders fell unexpectedly in September extending the previous month’s shrinkage. The forecast was for a 1.0% mom increase, a turnaround from -1.8% mom in August. The drop in September highlighted increasing risks of a slowdown in Eurozone’s largest economy, and weighed on the common currency. Eurozone’s retail sales, a closely watched measure of household confidence, are expected to have increased modestly in September. However, Germany’s sales stagnated in the same month, providing evidence that consumer sentiment in the bloc’s top economy is starting to wane. This increases the possibilities for a disappointment in the Eurozone figure as well. Sweden’s industrial production for September is also to be released.
• In the US, initial jobless claims for the week ended on Oct. 26 are expected to come at 262k from 260k the previous week. This would leave the 4-wk moving average unchanged at 259k. The preliminary Unit Labour Costs Index for Q3 is coming out as well and expectations are for the index to have risen after falling the previous quarter. Usually the market pays little attention to this indicator, but we will watch it closely due to the Fed’s emphasis on the employment data moving into the December FOMC meeting, and especially one day ahead of the US employment report.
• As for the speakers, besides BoE Governor Carney press conference, ECB President Mario Draghi gives another speech, while Fed Vice-Chair Stanley Fischer and New York Fed President William Dudley speak at a workshop. Philadelphia Fed President Patrick Harker, Chicago Fed President Charles Evans, Atlanta Fed President Dennis Lockhart, and Fed Board Governor Daniel Tarullo also speak. Fed speakers have to continue to communicate that they are likely to raise rates to avoid surprising the markets.