December FX Consensus Forecast

December FX Consensus Forecast

The US economy is passing through intensifying inflation pressure, widespread labor shortages, overwhelmed supply chains, and a newly discovered virus variant. It is worth wondering how the mighty superpower is holding its economic barometer in these times. The U.S. Gross Domestic Product, which measures the total output of the economy, grew by only 2.1% in November for a quarter-on-quarter annualized basis, against expectations of 2.3%. However, this is better than the previous print of 2.0% in October. The lower-than-expected growth is attributed to prevailing supply chain bottlenecks and rocketing inflation pressures. Fortunately, a pickup in the economy compared to the previous reading is owed to early signals of improvement in supply chain bottlenecks across a few sectors, and stagnant Delta variant cases. The recent spike in inflation levels in the U.S. economy, which reached 30-year highs, ignited calls for the Federal Reserve to shift gears on interest rate hikes earlier than expected. The analysis of the new Covid-19 variant's risk is currently still in progress. The Fed is calling this period of high inflation “transitory”, but the Americans who feel this high price pain for the last six months are getting impatient around this transition period.

Inflation is pressuring the consumer sentiment index to its lowest level of the decade, while signs of supply chain alleviations are emerging. The core Personal Consumption Expenditure (PCE) index for October, an indicator used to gauge inflation trends stands at 4.1% annualized, the same as expected, and it is higher than the previous reading of 3.7%, indicating a price surge over a monthly basis. The Michigan Consumer sentiment preliminary index for November stands at 66.8 vs expectations of 72, the lowest in the past ten years. On the supply chain front, there are signs which show alleviation in manufacturing and construction data. The price of Lumber stayed around 24% lower than the near-term peak of October and well below its May high, indicating demand from home inventories replenishment. Additionally, the Taiwan manufacturing backlog fell drastically, indicating that semiconductor production capacity is improving due to strong global demand. The market PMI composite index for October sets at 57.6, slightly higher than expectations of 57.3, and the retail sales figure for October surpasses expectations and prints at 1.7% against 1.4% expected. All in all, this shows that bottlenecks in the supply chain have started to improve at a modest pace. 

There were fewer jobless claims and better employment data, but there were lower workers in the workforce. Jobless claims data in the latest release of November was released at 252,250, the lowest levels since the start of the pandemic, while the unemployment rate for October stumbled to 4.6% against expectations of 4.7%. Indeed, job postings have increased 50% compared to pre-pandemic base levels, but the gap between job postings and hires has risen as it’s a worker-driven market. The labor participation rate is 61.5%, 1.7% lower than February 2020 levels. Looking ahead, the U.S. economy is estimated to see a drop in productivity in 2021 by almost 1%, due to the struggling labor market and slow recovery in supply chain disruptions.

Amid dynamics of high inflation, low consumer confidence, and modest supply chain recovery, there comes the new variant of Coronavirus called the Omicron, which is reported to have up to 30 mutations and has already shaken up global financial markets slightly in the past week. Fed chair Jerome Powell has expressed his concerns regarding the new virus and its effect on the economy amid the ongoing inflation time. Scientists are researching to understand the risk possessed by the virus, while pharma companies are looking to shift their gears towards developing vaccinations against it. On the monetary policy side, the Federal Reserve, acknowledging that unemployment levels are improving and inflation is well above the 2% target, is expected to begin its gradual process of reducing its bond purchase in November.

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