U.S NFP To Bring Back Focus On Fed Rate Hikes – Deutsche Bank Settlement To Drive Stock Markets
The markets were driven last week by two main drivers which were – the energy producers meet at Algiers, and Deutsche Bank’s US Department Of Justice sub-prime mortgages probe. Both factors continued to create high volatility across the board.
US listed shares of Germany’s largest lender fell as much as 24% and hit a record low on Thursday, since the Department of Justice demanded $14 billion from the bank to settle charges related to its sale of mortgage-backed securities before the sub-prime financial crisis. However, the stock rebounded on Friday, after news agency Agence France-Presse reported that Deutsche was nearing a $5.4 billion settlement with the DOJ, well below the originally demanded amount.
In the US, the Dow Jones closed 0.91% higher, the S&P 500 index rose 0.8% and the NASDAQ Composite index climbed 0.81%. Coupled with global stocks, the Euro was also boosted by the rebound in Deutsche Bank shares.EUR/USD added 0.19% to reach an intra-day high at 1.12502 in late trade on Friday, after falling as low as 1.11525 earlier, which was the weakest level since September 21.
The Deutsche Bank crisis seems to be easing but the markets are likely to continue to remain volatile as the bank’s executives are heading to the United States in the coming days to negotiate the final settlement, the Frankfurter Allegemeine Zeitung reported.
Nonetheless, the prevailing theme of a “Potential US rate hike” will come back to dominate the news flow in the coming week, with the closely watched Non Farm Payrolls report scheduled for Friday. Monthly data on the state of the U.S labor market will be released by The U.S. Labor Department at 12:30 GMT on Friday. Analysts forecast a job growth of 170,000, following an increase of 151,000 in August. The unemployment rate is expected to hold steady at 4.9%, while average hourly earnings may show a rise of 0.3% after gaining 0.1% a month earlier.
Upbeat data will support the case for higher interest rates at the end of this year and in the following months, which in turn will help strengthen the greenback. On the contrary, a weak report would add to uncertainty over the economic outlook and prompt Fed officials to delay the plans with regards to policy normalization to next year.
In other notable data releases in the coming week , The Institute of Supply Management is to report on September manufacturing activity on Monday, and service sector activity on Wednesday. The gauge for the former is expected to rise to 50.3, after falling to a seven-month low of 49.4 a month earlier, while services index is forecast to come in at 53.0. In August, the service sector index also dropped to 51.4, its weakest level since February 2010.
A handful of Fed policymakers are due to deliver speeches in the coming week, with the highlight being the speech by Vice Chair Stanley Fischer on Friday. Comments from the different Fed Officials, may deepen perceptions of a division among them about the pace of raising rates in the coming months.
Richmond Fed President Jeffrey Lacker is due to speak on the economic outlook on Tuesday. Chicago Fed President Charles Evans, Minneapolis Fed President Neel Kashkari and Richmond Fed President Jeffrey Lacker are on tap on Wednesday.
Finally, Fed Vice Chair Stanley Fischer, Cleveland Fed President Loretta Mester, Fed Governor Lael Brainard and Kansas City Fed President Esther George are all scheduled to speak on Friday.
According to the CME’s Fed Watch Tool, markets are currently pricing in a 10.3% chance of a rate hike in November, and nearly 62% probability of a rate hike at December’s meeting.
The Australian dollar rose for a second consecutive week after minutes from the Reserve Bank of Australia’s August meeting were released on September 20. The minutes said that interest rates were likely to remain on hold in the foreseeable future. Therefore, the RBA is not expected to change interest rates at its September meeting on Tuesday. Before that, the country’s PMI manufacturing report will be published and may affect future monetary-policy considerations.
Another commodity currency the Canadian dollar, also finished the week higher against the U.S dollar. The CAD had been driven largely by the movement in oil prices before data on Friday showed that Canadian GDP growth accelerated more than expected in July.
Crude prices gained for the third day in a row on Friday, as oversupply conditions in the market seem to be abating. OPEC members agreed on output cuts for the first time in eight years on Wednesday, and U.S supplies and inventories seem to be shrinking continuously based on API and EIA data reported over the past few weeks.
Although the deal to cut oil output will not be officially finalized till the formal meeting of OPEC members on November 30th, oil hit three-week highs amid prospects that OPEC would re-establish an output ceiling in the range of 32.5-33.0 million bpd, which equates to a reduction of 200,000- 700,000 bpd compared to the current level.
Meanwhile, U.S. crude supplies fell for the fourth week in a row, the EIA said on Wednesday. Official data reported that U.S. crude stocks declined by 1.9 million barrels to 502.7 million barrels in the week to Sept. 23. This data was in sharp contrast to expectations that inventories would rebound in the current week, after big drops in previous weeks.
However, there are indications of a nascent recovery in domestic U.S drilling activity. Oilfield services provider Baker Hughes said late Friday that the number of rigs drilling for oil in the U.S. last week rose by 7 to 425, marking the 13th increase in 14 weeks.
In the week ahead, oil traders will focus on weekly U.S. stockpile data on Tuesday and Wednesday for fresh supply-and-demand signals.
The British Pound was a gainer versus the U.S dollar last week but the gains were very small as the currency remained under the pressure of uncertainty related to the Brexit. The market is much likely to create a gap down on the market open on Monday after the statement from Prime Minister Theresa May that said she would begin negotiations related to the U.K.’s withdrawal from the European Union by the end of March.
U.K economic data next week include readings on September manufacturing sector activity on Monday, a report on the construction sector on Tuesday and the service sector on Wednesday.
The manufacturing PMI is forecast to decline to 51.1 from 53.3 a month earlier, construction activity is expected to decline slightly to 49.0 from 49.2, while a survey on major sector services is forecast to inch down to 52.0 from 52.9 last month.