No Comment From Yellen On Rates But US Dollar Rate Steadies Following Strong Data

Economic data released Wednesday suggest the adverse impact of hurricanes Harvey and Irma on the US economy may have been less that was previously feared.

Federal Reserve Chair Janet Yellen did not comment on monetary policy in her opening remarks at a banking conference in St Louis Wednesday, leaving the US Dollar steady at the tail end of a volatile session.

The Dollar spent much of Wednesday under pressure in London as speculation over whether Yellen will remain in her role after her term expires in February ramped up. There is a shortlist of candidates that includes Yellen although the final decision will be made by the White House.

Markets are focused on the chair position as well as the broader makeup of the Federal Open Market Committee in 2018 amid an unprecedented number of vacant seats. Traders care because vacant seats mean future interest rates are more difficult to predict.

The White House is seen preferring a candidate who is an advocate of looser policy, a dove, given that higher rates can squeeze economic growth by pushing up financing costs and making exports less competitive.

“We see a growing risk over time for greater political pressure on the Fed to support faster growth, smaller trade deficits, and more manufacturing employment — at the potential cost of higher inflation and/or risks to financial stability,” says Michael Hanson, a strategist at TD Securities.

In late September, Yellen indicated the Fed will stay its current course toward a higher Federal Funds rate and a smaller balance sheet.

The commitment surprised markets given low US inflation, low wage growth and softer economic data during the summer period.

Since then, traders have have been pricing another rate hike in December and two or three hikes in 2018, which has boosted the Dollar.

But with all of the good news now priced in and markets having turned their attention toward a growing list of potential successors to Yellen and other FOMC members, the greenback could be volatile over the coming months.

The Euro-to-Dollar rate was stable at around 1.1760, roughly where it was at the beginning of trading in London Wednesday, after Yellen’s speech.

Similar was true for the Pound-to-Dollar pair, which traded around 1.3250 immediately after Yellen’s speech, roughly in line with its opening level Wednesday.

Hurricane Impact On US Economy Seen Muted

The ISM non manufacturing index, a broad measure of sentiment and activity within the services sector, rose from 55.3 to 59.8 Wednesday.

This was far ahead of expectations for a more modest acceleration to 55.5 and marked the barometer’s highest level since August 2015. It followed last week’s ISM Manufacturing PMI, which surged to a 13 year high.

Taken together the data suggest the adverse impact of hurricanes Harvey and Irma on the US economy may have been less that was previously feared.

That said, the full effect of August and September’s weather related destruction on the labour market is still unknown.

Earlier on Wednesday, ADP monthly employment report showed the US economy adding 135,000 new jobs during the month, down from 237,000 in August, but a touch ahead of economist forecasts for 131,000 jobs gains.

The number comes just Friday’s all-important nonfarm payrolls report and was were heavily influenced by fallout from hurricanes Harvey and Irma.

“If the ADP measure was up only 135,000, then there could be downside risks to our estimate that non-farm payrolls increased by 100,000 (consensus 95,000). We’ll find out one way or the other on Friday,” says Paul Ashworth, chief North American economist at Capital Economics.

Differing methodologies between how the two are counted mean the ADP number should have been relatively unaffected by the recent hurricanes. But the number of new jobs added declined by more than 100,000 during September.