With all eyes on the US for clues over what the Fed may do about interest rates later this month, today’s mixed US data attracted particular attention. While manufacturing PMI came surprisingly weak, construction spending was surprisingly strong.
A look at PMI for the last three months suggests that the US manufacturing sector did well in October after Fed delayed interest rate liftoff at its Sept meeting, and poorly in November as Fed members signalled toward a Dec rate hike.
It appears that the Fed may have painted itself into a corner with its indecision on interest rates starting to distort the economy rather than helping it. If the Fed is going to cause a slowdown every time they try to lift rates off zero, will they delay again this month or will they find it better to get liftoff over with so everyone can move on?
Over the next 24 hours we should get a better idea on which way things are heading with ADP payrolls, a number of FOMC members speaking plus the Beige Book Regional report. Two appearances by Fed Chair Yellen could be particularly significant to see if she is going to panic or indicate the Fed remains on track toward liftoff. Don't forget that since September, signs of dovishness have been seen as a negative for stocks while hawkish signs have been read as a positive for equity markets. It will also be interesting if Fed Governors Brainard tonight and Tarullo tomorrow remain dovish or change their stances.
While stocks in the US advanced today indicating traders don’t think the weak PMI was enough to knock the Fed off course (offset by positive Markit PMI and construction spending) resource weighted markets like Canada and Australia have been particularly strong. Mining stocks benefitted from another big bounce in copper which could carry through to today’s trading Australian stocks may also be influenced by today’s GDP report.
Australia data may also impact trading in AUD and NZD which have been on fire overnight. USD slipped back on the PMI report and with uncertainty swirling around European currencies ahead of Thursday’s ECB meeting, the resource dollars were positioned to take the most advantage of this change in sentiment.
CAD finished the day flat against USD while the S&P/TSX rallied on a combination of the metals recovery and a strong kickoff to bank earnings week from the Bank of Montreal. Canadian economic numbers were mixed with soft GDP offset by improving manufacturing PMI. It still looks like the Bank of Canada should hold steady at tomorrow’s meeting but the GDP created enough doubt and opened the door a crack to a cut enough to keep CAD training behind other resource currencies.
A surprise increase in US API oil inventories hasn’t had much of an impact on WTI which remains above $40.00, a sign the market could be getting washed out.
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