US: Good week for the USD – BBH

According to analysts at BBH, this has been a good week for the US dollar as its 1.25% gain this week is the largest of the year.  

Key Quotes

“The drivers are two-fold:  positive developments in the US and negative developments abroad.”  

“The positive developments in the US include growing acceptance that the Fed will raise rates in December and that there will be more rate hikes next year.  The Fed says three.  The market now accepts at least one hike and has begun factoring in another.  Also, the necessary steps toward tax reform have been taken.  The first important step was the passage of the FY18 budget.  The House passed the Senate version.  The next step will come next week when the Chair of the House Ways and Means Committee releases his tax reform plan.  It will then be marked up in committee.”  

“Meanwhile, the buzz is that it is down to Powell and Taylor for Fed appointments.  We think there is a reasonable chance that both are appointed.  In any event, our general view is that in normal times, there is a large technocratic function rather ideological.  The chief difference may lie in how the individuals respond to a crisis.”  

“The FOMC meeting next week will be the first that the new governor Quarles participates.  Reports of a longstanding personal rivalry between Quarles and Warsh may help explain why Warsh's prospects have gradually dimmed.  We estimate that fair value for the December Fed funds, assuming no chance of a hike next week, is 1.295%.  The implied yield currently is 1.275%.”  

“In addition, the US data suggest the economy has borne the record storms and California fire fairly well.  Corporate earnings have been strong.  Today, the first look at Q3 GDP will be reported.  It is unlikely to match the 3.1% annualized pace in Q2, but will still be well above trend, which is seen a little below 2%.  The composition of the growth may be a bit disappointing.  It appears that consumption slowed but inventory growth accelerated.  We sense that 1) investors may put more weight on GDP than the Fed and 2) officials may put more emphasis on real final domestic demand--excludes inventory and trade--as signals for the domestic growth impulses.”  

“Looking further afield, at the end of next week, the US will report October employment figures.  Non-farm payrolls are expected to jump by more than 300k as they bounce back from a storm-inflicted decline in September.”