The autumn data from the US suggests growth has slowed since the more robust readings of the summer. The pullback in export and manufacturing sectors has weighed on growth expectations, although consumer spending growth has also eased from its earlier higher levels. Taking the pullback in to account the markets still expect relatively stable growth over the next twelve months, with more weakness in manufacturing offset by gains in both consumption and home building, as well as a stem to the bleed in the energy sector.
The one continuing upbeat theme for the US economy, remains the robust US labor market story. Non farm payrolls were up 211k in November. The continued 200k+ readings suggest underlying strength in the broader economic base, however the pullback in key employment sector data since the summer is likely to read through to employment figures early in the next quarter, that said, it is highly likely that over the next twelve months the US economy registers full employment.
A further supporting factor is the buoyancy that is being demonstrated in wage growth data versus the employment cost index and average hourly earnings, which points towards a Q3 figure of circa 2.5%, which is the fastest rate of increase since 2012.
The pop in the pay data is pressuring unit labour cost inflation which has moved above 3% leading to an uptick in labour’s share of GDP, this effectively has a negative read through to US profit margins which will likely move side ways from current levels, combined with USD strength discussed last week, this likely pressures US asset market performance next year.
NFP’s Leave Little Doubt About A December Lift Off. The implied probabilities is currently priced at 79% probability, attention now firmly focuses on the pace of hikes in 2016. The US employment data is one of the main contributors to the hawkish argument here. Data is likely to demonstrate full employment next year, as such the FED will have satisfied the employment requirement of their mandate, which will drive further increases in wage and core inflation data, which should in turn have a positive pass through to GDP. This will read through to a probable equilibrium rate of circa 100basis points over the next twelve months, which is near double current bond market hiking projections.
There are obvious vulnerabilities to this view, firstly a more protracted slowdown in manufacturing and export sectors would ultimately lead to a more significant dent in 2016 employment and wages data This would bring the FED back into play at pace, at best slowing the rate of normalization at worse raising questions of more accommodation. This scenario would raise markets concerns of over tightening in the near term, with the more serious concern of the necessity of a future far steeper rate of tightening.
Turning to the actual event, the meeting on the 16th has many undertones, no doubt the members of the committee are weighing concerns that the first rate event in the US in just under a decade maybe the catalyst for an exaggerated tightening in financial conditions, this will most likely mean that the statement will contain language specifically focused on mitigating market panic, with an emphasis on phrases that will put the weight of the path of subsequent moves firmly on the the strength of the economic data in coming months.
One aspect to monitor will be the ‘do plot’ it is likely that with a first move at the December meeting, we will witness a reduction in the longer term projections as well as the median rate for the remainder of 2016, which will be aimed at soothing markets. It is most likely that the net takeaway from a December move will be that action in January is most likely taken off the table and the attention will move to the March meeting, which will only be considered live should the data continue to corroborate the broader economic growth story, the ultimate emphasis will remain that the committee are firmly data dependent in their views on normalizing policy.
Technical Take Aways
From last week I suggested a near term pattern I am mapping, a structure that suggests the potential for a pullback to offer a platform to position long for a new cycle high in the USD, however, technically I believe if the USD upside thrust does develop as anticipated, that there would be better risk reward in fading this move.
Here is last weeks chart, directly below is how price has developed
The price action is developing as proposed and we could now see a platform develop for the final push that would coincide with next weeks FOMC meeting. In next weeks piece I will give specific trading patterns and levels I will be watching in to the meeting.
Remember probabilities suggest thrusts from prologoned consolidation prove terminal in the near term as too many market participants chase price action at poor locations. I am not suggesting a termination of the trend but more that this structure would provide a better trend entry after a shake out of poorly positioned players.
For updates on trade of the day set ups and the other trades I am currently monitoring be sure to follow me on Twitter @LFXPatrick