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Eco Focus is an aperiodic publication providing up-to-the-minute analysis of a current topic.
Fears about 'hard Brexit' have escalated in recent days and that has pushed GBP to fresh multi-year lows. We expect the concerns to linger and lower our GBP forecasts. We expect GBP/USD to finish the year at 1.23 and EUR/GBP at 0.90. Further out, we expect a cautious recovery because we believe that 'hard Brexit' will be avoided and that the UK will able to secure an enhanced free trade agreem ent with the EU in the coming years.
October nonfarm payrolls rose by 161K, which is likely closer to a sustainable pace of employment generation going forward with the economy near full employment. The October unemployment rate crept down to 4.9% while the participation rate slipped to 62.8%. October average hourly earnings rose 0.4% MoM, and accelerated to a 2.8% annual pace (after revisions to September). We expect earnings to strengthen in the months ahead with the economy close to full employment.
We expect the FOMC to keep policy unchanged at its November 2 meeting with the Fed funds target range maintained at 0.25% to 0.5% and no change in the FOMC's portfolio reinvestment policies. We continue to look for the FOMC to hike rates at its December 14 meeting as part of a gradual pace of rate normalization, including two additional 25 bps rate hikes during 2017.
We received the shortest ECB press conference in three years today and, to be honest, we have not learned a lot. We might be happy because the little we got tends to confirm our preview but we would have been happier if Mario Draghi had more clearly confirmed what we feel. Tapering fears are clearly overstated: albeit M. Draghi did not commit to anything, the ECB does not seem to be in the mood for a monetary policy tightening in the near term.
Because of an illegitimate, disturbing and – let us say it – highly contestable monetary-policy framework from the ECB, the economic, financial and political future of Portugal lies in DBRS's hands. On 21 October, DBRS will update its opinion on Portugal. If it downgrades the country's credit rating by one notch then Portuguese bonds will no longer be eligible as collateral at ECB refinancing operations nor for QE. Our base-case scenario is that DBRS will not downgrade Portugal and that it will keep its outlook unchanged (stable).
Yesterday, an article by Bloomberg hit the wires and triggered a strong reaction in the markets: according to Bloomberg, the ECB Governing Council is trying to build a consensus towards the fact that QE will have to be tapered. Of course, "the officials asked not to be identified" and, to be honest, the actual content of the article is way less catchy than the headline: it does not say at any point that the ECB's tapering is to be started in the near term. On the contrary, it explains that "they didn't exclude that the program could still be extended at the full pace of 80 billion euros ($90 billion) a month".
The FOMC, as widely expected, opted for unchanged policy at its September meeting with the Fed funds target range maintained at 0.25% to 0.50%. Market participants saw a relatively low probability for a rate hike with policymakers split over the near-term rate normalization path. We look for the FOMC to hike the Fed funds rate by 25 bps on 14- December. Chair Yellen's comment that the case for a rate hike has strengthened was echoed in the statement. Moreover, the FOMC noted that the "near-term risks to the economic outlook appear roughly balanced."
The ECB did not officially extend QE, but they clearly pointed towards a change in the modalities over the near-term ("tasked the relevant committee"); we see it as a step towards an official extension in October or in December this year, along with an easing of purchase modalities, probably a removal of the deposit rate floor.
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