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Focus shifts to the Fed with NFP in sight - MUFG

FXStreet (Delhi) – Derek Halpenny, European Head of GMR at MUFG, notes that the fact that the ECB and the Fed will continue to go in different directions will be clear today when the jobs report for November is released in the US.

Key Quotes

“Our NFP model has estimated today’s NFP gain at 179k, which is a little less than the Bloomberg consensus of 200k but would be good enough to confirm an FOMC rate increase on 16th December. Indeed, a much weaker gain than that would still not alter Fed action this month.”

“Fed Chair Yellen played down the importance of today’s report by stating that the FOMC would not look too closely at any one piece of data and that the underlying trend is what is important. In any case, Yellen also estimated that less than 100k was all that was required to provide jobs to new entrants to the labour market. Anything above that is therefore removing the slack in the market.”

“This could certainly be viewed as the FOMC trying to lower the bar for further action in 2016 as the pace of job creation possibly eases. The fact that Chair Yellen made reference to monitoring “actual inflation” going forward in her speech on Wednesday likely means that there will be a shift in importance toward inflation data.”

“The jobs data will still be crucial of course but actual inflation readings perhaps equally so. Underlying inflation pressures are building and the oil base effect unwind that is imminent means overall inflation will accelerate too, so inflationary pressures may well lend to Fed action continuing in 2016.”

“In those circumstances, we still see potential for higher yields at the short-end of the US yield curve. The March 2016 fed funds futures price implies an effective fed funds rate of 0.40%. If you assume the effective rate remains in the middle of the range, that price implies only a small probability of a second hike in March.”

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