Key highlights of the week ended October 30

Source: Dukascopy Bank SA
US
As widely expected the Fed maintained its key interest rates unchanged at its October meeting. But what is more important is the fact the US central bank explicitly stated that it might hike short-term interest rates in December, downplaying recent global financial market turbulence and saying the US labour market was strengthening despite a slower pace of job growth. Individual central bankers have signalled before that they expected to start normalizing monetary policy before year-end. The Fed's FOMC had not previously stated so explicitly in a communique the potential timing of a rate hike. Investors were quick to change their mind, with futures contracts suggesting a 43% possibility of an interest rate hike in December compared to 34% prior to the Fed's statement. Fed officials noted that household spending, which makes up 70% of economic activity, and business fixed investment rose at a solid pace in recent months, coupled with a further strengthening in the housing sector, whereas net exports have been soft. Now that the Fed has put a December rate hike firmly on agenda, the question is whether the US economy will play along. Third-quarter GDP and jobless claims data are due today, with economic growth being expected to slow significantly. 

New Zealand
The Reserve Bank of New Zealand signalled it is likely to slash interest rates again after it maintained them on hold following three consecutive reductions. The central bank kept rates at 2.75%, admitting that further actions might be required to reach their inflation target. RBNZ Governor Graeme Wheeler is concerned about turning up heat in an already hot Auckland housing market with lower borrowing costs, and also wants to keep ammunition on hand in case the global economic outlook deteriorates. At the same time, a strengthening New Zealand Dollar put Wheeler's attempts to return inflation to the 2% target midpoint for the first time since 2011 in jeopardy. The Kiwi Dollar gained as much as 9% versus the Greenback in the past month amid growing uncertainty over the timing of Fed's interest rate hike and as investors pared bets on an RBNZ rate reduction in October.

Japan
The Bank of Japan refrained from expanding its massive stimulus programme, hoping the world's third biggest economy can withstand the drag from China's slowdown without extra monetary support. The central bank reiterated its pledge to increase its monetary base at an annual rate of 80 trillion yen. The BoJ said that the decision was made in an eight-to-one vote. However, the BoJ is likely to remain under pressure to step up its already hefty asset-buying scheme as falling energy costs, sluggish exports and a weak recovery in household spending keep inflation considerably below its 2% target. Core consumer prices dropped 0.1% in the 12 months through September, a second monthly decrease, while household spending plunged 1.3% from a year earlier. 

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