US economy and Fed comes back into focus - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that with the DXY index now up 2.5% in October to date, today will provide us with some further information on the health of the US economy in Q3 and what the FOMC might be thinking as we approach the possible moment of a second rate increase in December.

Key Quotes

“The retail sales data for September will be important in shaping expectations for Q3 GDP, which will be released on 28th October. Control Group Retail sales declined in both July and August, by 0.1% and hence a notable rebound is expected in today’s data.

Given that real disposable incomes are rising at around 2.5%, the weakness in Control Group Sales looks implausible and that points to a better reading today. The good news is that the bar is not too high for real consumer spending to still post a reasonable Q/Q growth rate due to the strength of real consumer spending toward the end of Q2 and the fact that total real consumption held up well in July. On the basis of July and August real consumer spending, the Q/Q increase over the Q2 level currently stands at 2.4% on an annualised basis. A rebound today that is then repeated in the real consumer spending data for September means a Q/Q gain of around 2.7%-2.8% is realistic. That is currently the market consensus for overall real GDP too and will certainly be viewed as good enough of a rebound to justify action by the FOMC in December.

Fed Chair Yellen will speak at 18:30 this evening at an event in Boston on economic analysis but we may not get much in the way of any detailed update on the economy or monetary policy outlook at this stage. Nonetheless, if any comments are provided the indication from Yellen is likely to be that the economy continues to advance in a way consistent with progress toward the dual mandate of the Fed that would justify a rate increase before the end of the year. Philly Fed President Harker was explicit in his view yesterday that one rate increase this year is justified.

But with the dollar up notably in October, we are unlikely to see further buying impetus specifically from indications of a rate increase in December. The probability of a rate hike remains stable at around 65% and given there are still two months to that December meeting, the markets are unlikely to raise that probability further at this stage.”