FX News Today

German Q3 GDP slowed to 0.3% q/q, from 0.4% q/q in Q2, in line with expectations. The working day adjusted annual rate improved to 1.7% y/y from 1.6% y/y. There is no full breakdown with the preliminary numbers, but the statistics office said in its press release that growth was mainly driven by private and public consumption. Investment seems to have contracted slightly and there was a negative contribution from net exports, as import growth outstripped export growth. So for once a consumption driven economy, not the usual export led growth pattern. This clearly is also due to the ECB’s ultra-accommodative policy, that is also causing problems for banks and insurers, but also households forced to increase private pension provisions.

Bullard and Lacker look for higher rates. Lacker: the case for raising rates is “strong”said the Fed hawk, who dissented at the last two meetings against the consensus to keep policy on hole. He acknowledged to reporters that his “dots” are higher than the FOMC median, something we had already surmised given his very public hawkish stance. On the policy path, he added that the “gradual” pace is just an expectation and warned the FOMC could change its mind. He worries that the Fed could get into a rut of 25 bp hikes per meeting. He, of course, rotates out of voting status next year, but will be replaced by three other kestrels, including Bullard, Mester, and George. Bullard: a shallower tightening path is likelycompared to 1990s or 2000s, said the St. Louis Fed president, dependent on the economy — steeper if it booms. G7 nations as a whole, however, are still a ways away from normalizing and near zero rates appear to be the norm there for at least a couple of years. The Fed will rely on the usual metrics for each hike, including whether the labor market becomes very tight. He sees the debate over the Fed role as healthy given the large one it played in response to the financial crisis. This is about par for moderate Bullard, again focusing more on the longer-term.

92% of economists surveyed expect a December Fed hike according to the latest WSJ survey published, barring a cataclysmic event of some sort. 5% see the Fed remaining on hold until March and 3% see ZIRP for longer than that. Back in October 64% of those surveyed saw a December hike. It seems Janet and company have done their guidance job well, backed up by the October payrolls report, though this leaves their credibility at stake on December 16 to follow through this time.

Main Macro Events Today

• US PPI: October PPI is out Friday and should reveal a 0.3% (median 0.2%) headline for the month with the core up 0.1% (median 0.1%) This follows respective September figures of -0.5% for the headline and -0.3% for the core. Declining oil prices have weighed on the various inflation measures over the year but they appear to have leveled off in recent months and even posted a small gain in October which should allow for headline increases.
• US Retail Sales: October retail sales will be released today and the headline is expected to be up 0.4% (median 0.2%) with the ex-autos rate up 0.5% (median 0.4%). There is upside risk to the release from the firm vehicle sales data, improvements in consumer confidence and the bounce in construction hours worked that we have seen in October. This should be enough to offset the potential downside from slightly slower chain store sales.
• US Business Inventories: The September business inventory data is out on Friday and should reveal an unchanged (median 0.1%) figure for inventories with shipments flat as well. This comes on the heels of respective August figures which had inventories unchanged and shipments down 0.6%. Data in line with this forecast would leave the I/S ratio steady at 1.37 from August, prior to that the ratio had held at 1.36 since March.

Janne Muta

Chief Market Analyst

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