Three Central Banks Three Diverging Views

Janet Yellen just about shouted as loud as she could that there will be a rate increase in December. On Wednesday, Yellen gave here standard testimony to US lawmakers. Federal Reserve Chair Janet Yellen told Congress that the Fed could raise its key interest rate at its next meeting in December. It would the first rate hike — known as “liftoff” — in almost a decade. Yellen expressed optimism that the U.S. economy is getting stronger. She cited improvements in the job market, consumer spending and also said the things keeping inflation low — cheap oil prices — are temporary. “At this point, I see the U.S. economy as performing well,” Yellen told the House Financial Services Committee. Even the global economy is holding up better than many thought.

The US dollar continued to climb touching 98 on Wednesday and is holding pretty steady on Thursday morning. Commentary from Fed chair Janet Yellen has generated a minor sell-off on Wall Street as traders mull the rising prospect of a December rate hike.

While Yellen was careful to insist a December move was far from a foregone conclusion, her comments clearly hinted at a US central bank leaning toward lift-off this year. Strong economic data enhanced the possibility of an imminent rate rise as private payrolls data, trade numbers and services sector growth rates all impressed.

Private payrolls were seen jumping 182,000 in October, slightly edging forecasts for a lift of 180,000. The private jobs data are a precursor to Friday’s official employment report and bode well for an uptick in jobs growth. Perhaps more important was a sharp expansion in the services sector, which makes up the bulk of the US economy. The ISM non-manufacturing PMI surged to 59.1 in October, well clear of September’s 56.9 reading and expectations of a dip to 56.8.

Moving to the opposite, Mario Draghi assured markets that the ECB will inject whatever stimulus is necessary to jump start the sagging Eurozone economy. Mr Draghi said whether the central bank needs to boost its quantitative-easing program is still an “open question”.

Against the US dollar and the Swiss franc, the euro dropped to a 6-day low of 1.0916 and a 1-week low of 1.0839 from early highs of 1.0968 and 1.0868, respectively.

During his speech in Frankfurt, the central banker said that the monetary policy package will be examined in December and that the ECB is willing to act to maintain monetary policy accommodation.

“People have come to the realization that the Fed is kind of hell-bent on getting to a liftoff”, said Robert van Battenberg, director of flow strategy at Societe Generale in New York. European purchasing manager indices were mixed compared to expectations but all pointed to growth. Activity in China’s services sector expanded at its fastest pace in three months in October thanks to stronger new business.

In the meantime the Bank of Japan minutes this morning showed that the Bank of Japan has pushed back the forecast for achieving its target of a 2 percent annual inflation to pull the economy out of deflation. When BOJ Gov. Haruhiko Kuroda launched the “unprecedented” monetary easing operation — a centerpiece of Prime Minister Shinzo Abe’s trademark “Abenomics” policies — in April 2013, the bank remains was confident the inflation goal would be attained in about two years. The central bank last increased its quantitative easing program in October 2014 to the current levels of 80 trillion yen. The yen experienced positive pressures as a safe haven currency as geopolitical tensions increased between China and Japan earlier last week. The Japanese yen is trading near the bottom of its range, against the US dollar the pair is trading at 121.45.