Water on Mars

The Canadian Dollar was the best performer last week relative to the greenback despite only a moderately positive GDP month-over-month. The real reason for the appearance of loonie strength is the fact that you can’t have a winner without a loser, and last week the greenback and Pound Sterling took the booby prizes.

The recent surge of GBP sell-off is likely being driven by the widening gap between the expected timing of the Fed rate hike and BoE’s rate hike, rather than the gradual deterioration of the UK’s economic outlook.

Noteworthy events this week include the annual Conservative Party conference which may hint at a potential date for their EU referendum. For those of you that don’t know, the UK is set to have a referendum by the end of 2017 on whether or not to remain a member of the European Union. Generally, big businesses are showing support to remain in the EU because it makes it easier for them to move products, people and money around the world. Others disagree, suggesting that an EU exit would allow the UK to negotiate trade deals as one country and not just one of 28. The British Chambers of Commerce indicated that 55% of members are backing staying in a reformed EU.

Last week, virtually any data that could suggest a growing U.S. economy was negative, including non-farm employment which came in at a disappointing 142K in contrast to the forecast of 201,000. The unemployment rate came in at 5.1% - unchanged and, hourly earnings were no good at 0.0% month-over-month. Finally, the labour force participation rate dipped to 62.4%, the lowest level since October of 1977.

A slowdown in overseas markets, a stronger dollar and lower oil prices have been hampering exports and manufacturing may be the reason why employers are hesitating before hiring more staff. Companies across the U.S. are increasingly reporting fallout from the strong U.S. dollar and slowdown in Asia. Those concerns are expected to draw heightened attention as firms begin announcing third-quarter earnings.

From WSJ

Most markedly however, this has vindicated the FED’s decision to delay an interest-rate increase last month. The central bank, which hasn’t raised rates since 2006, held off in September mainly due to worries about global weakness dwindling the U.S. economy’s strength. But the fact remains, we know Yellen wants to raise rates and, we know she will, but this data says not just yet… Perhaps the Fed will raise rates before they find water on Mars. Oh wait, NASA found that last week – or something to that effect.

In fact, the economic slowdown suggests we may not see a rate hike until January (not in October or December), and since the FED alluded to a gradual raise in borrowing costs, the hikes could continue well into 2017.

Eurozone Growth is Waning

 Final Eurozone Composite Output Index September:
53.6 (Flash 53.9, August 54.3)

 Final Eurozone Services Business Activity Index September:
53.7 (Flash 54.0, August 54.4)

The Eurozone economy continued to make steady progress in September as solid gains in output and new orders supported further job growth. However, the rate of activity grew at its weakest pace at a 4-month low. The average rate of expansion over Q3 failed to accelerate and instead equalled Q2 4-yr high. On the bright side for the European Central Bank, service firms raised prices for the first time in 4 years. Overall, the Eurozone expanded only 0.4% in Q3.

European companies slowed their pace of hiring as new business orders cooled off in Q3. Several ECB policy-makers, led by ECB President Mario Draghi, have publicly suggested in the past that the trillion EUR stimulus programme could be extended if inflation targets of 2% are not achieved. Those voices got louder last week after official data showed that Eurozone inflation slipped below 0% in September.

According to Reuters, “A [Reuters] poll last month predicted the ECB would officially extend its asset purchase program beyond September 2016 in yet another attempt to drive up inflation and rekindle growth and those calls probably grew louder after official data showed euro zone inflation slipped below zero again in September.”