How dovish will the Fed be?


Following a disappointing assessment from the National Association of Home Builders on Monday investors might have expected yesterday's data for housing start and building permits to look a little flabby too. That was not the case. Housing starts increased by a monthly 3.2% in November and permits were up by 5.1%. Except for today's existing home sales they were the last US ecostats to appear ahead of this afternoon's rate announcement by the Federal Open Market Committee.

The general assumption - though it is not guaranteed - is that the Funds rate will go up by another quarter percentage point, despite the president warning the Fed not to "make another mistake". A greater uncertainty is the rate outlook next year. Before the equity sell-off in the fall, investors had been primed for three more rate hikes in 2019. Now, that expectation has been wound down to two, maybe just one. The hawkish/dovish tone of the Fed statement will be critical to the USD's short-term prospects.


Investors found it difficult to choose between the USD and the EUR. The euro changed direction three times, covering a half-cent range, before ending up back where it had started, virtually unchanged on the day. A 3.3% annual increase in German producer prices added nothing to the debate and nor did a 1.8% rise in Euroland construction output.

The Italian budget situation seems at last to have been resolved after three months of bickering. Prime Minister Giuseppe Conte cautioned that the "procedure" has yet to be completed but the message is that Italy's 2019 budget deficit has been reduced to a level that satisfies the European Commission. Resolution of the dispute should make it easier and cheaper for Italy to borrow, with the spread over 10-year German bonds now back below 3%.


Canada had only one statistic to show on Tuesday: manufacturing shipments for October. It did not pass muster, with shipments falling by a monthly 0.1% instead of increasing by the forecast 0.4%. Although the CAD began to head lower shortly after the data were announced, it was not the tiny slippage in shipments that did the damage, it was another 3% fall in oil prices.

The CAD lost 0.5% to the USD. It is down by 2.2% from its level a month ago, a decline that has had a lot to do with the 17.5% decline in oil prices over the same period. With North American shale output currently exceeding that of eight OPEC members there is no sign yet of an upturn in oil prices.


Like the EUR, the GBP was unchanged on the day against the USD. This morning's UK inflation data were arguably positive for it: of the dozen measures - consumer and retail prices, producer prices and house prices - only one failed to match analysts' forecasts. Headline inflation came in on target at 2.3%. The numbers made little difference to the GBP because the Bank of England is unlikely to make any change to policy until the Brexit situation becomes clear.

As yet it is far from clear. The talk in Downing Street yesterday was of troops on standby in case of a no-deal Brexit. But investors refuse to believe that Britain will leave the EU without a deal. They are refusing to panic and are mostly well-disposed towards the GBP.


The yen was another non-mover. Japanese economic data were limited to the balance of trade for November. The deficit widened considerably as imports increased by 12.5% while exports were up by a trifling 0.1%.

Tonight the Bank of Japan will issue its Monetary Policy Statement and the governor will hold a press conference. No change is expected to interest rates but Kuroda San might have something to say about the wind-down of the BoJ's asset purchase program.

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