It was a lighter week for U.S. data, but there was an important monetary policy announcement from the European Central Bank, and U.S. trade data has implications for fourth quarter GDP.
The European Central Bank left its key policy interest rates unchanged, near zero, and in the case of its deposit rate, at -0.4 percent. President Mario Draghi announced that asset purchases would extend beyond March 2017, but at a reduced pace of 60 billion euros per month. Draghi indicated that asset purchases were likely to continue through the end of 2017. The euro had been strengthening against the dollar in late November, but reversed course, weakening after the ECB announcement. At 1.06 euros to the dollar, parity is not far away.
The U.S. international trade deficit widened in October to -$42.6 billion. The inflation-adjusted balance of trade in goods fell to -$60.3 billion for the month, below the third quarter average, meaning that trade is on course to be a drag on GDP growth for the fourth quarter.
The ISM Non-Manufacturing Index for November increased to 57.2, showing that the service sector performed well for the month. Both the ISM Non-Manufacturing Index and the Manufacturing Index improved in November, consistent with near-3-percent real GDP growth for the fourth quarter.
The job openings rate for October was steady at 3.7 percent, a good number. Hiring and separation rates were also unchanged for the month. Initial claims for unemployment insurance fell by 10,000 for the week ending December 3, to hit 258,000. Continuing claims fell noticeably by 79,000 for the week ending November 26, to hit a very low 2,005,000.
We continue to expect the Federal Reserve to increase the effective range of the fed funds rate by 25 basis points on Wednesday, December 14. The fed funds futures market places an implied probability of 97.2 percent on the event. Fed officials have done nothing to counter the very strong market expectation.
The most interesting new element of the Fed’s upcoming policy announcement will be how it guides expectations for 2017. We will get a new set of economic forecasts from the Fed on Dec. 14, and a new dot plot. The dot plot shifted down through 2016. We will watch to see if it shifts again next week.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: cmaeconweekly-12-09-2016.