- US data released on Wednesday show that economy has started to shrug off the impact of the earlier financial stress
- US dollar strengthens as expectations for rate hike increase…
- …but stronger dollar leads to a renewed tightening of financial conditions
US ADP private employment report shows moderate job gains
October’s ADP report showed that private employment increased by 182K, coming down from a downwardly revised 190K the previous month. Small businesses hiring contributed with half of this increase. Goods producing employment picked up by 24K, resulting in the strongest increase since January. Services employment rose by 158K, down from 182K the previous month. From an industry perspective, manufacturing continued to subtract jobs. For the employment report to be released on Friday, we are expecting an increase of 170K. The expected gains are consistent with an economy that is growing around trend rates and with more stability in financial markets.
US services PMI picks up in October
The US services sector has been holding up well in contrast to manufacturing activity and is consistent with the stronger consumption growth of the past months. Indeed, the ISM non-manufacturing index increased to 59.1 from 56.9 the previous month. The new orders index rebounded to 62 from 56.7. The employment index increased to 59.2 from 58.3 in September. Overall, October’s composite ISM, which offers of picture of the whole economy, edged up in October to 55 from 54.5.
US trade deficit narrows as a result of increasing exports
Although trade data is quite volatile, September’s trade deficit narrowed to USD 40.8bn from USD 48.3bn the previous month, hitting the lowest level since February. Exports rebounded 1.6% mom in nominal terms, after posting a 2.0% mom decline in August. Imports fell 1.8% mom in nominal terms. We don’t think that this will be a new trend since, the strong dollar and lacklustre global trade will continue taking its toll. We expect net trade will be a drag on growth this year.
Probability of December rate hike increases, but stronger dollar still a threat
The more positive than expected string of data that was released on Wednesday led markets to price in a higher probability of a Fed rate hike in December this year (rising up to 58%). Remarks from Chair Yellen, during a congressional hearing, confirmed that December was a “live possibility” adding fuel to these expectations. This led to a stronger dollar, which also means tighter financial conditions. On top of this, moves from other central banks to ease, will likely put additional pressure on the USD. We have seen in the past months that the impact of a strong dollar has made its way to weaker export growth and has had a negative impact on manufacturing activity that is export related. It remains to be seen whether the pricing of an earlier rate hike negatively impacts sentiment and leads to a renewed tightening of financial conditions. Our base case is a hike will be delayed to 2016, but chances of an earlier move have risen.