December lift-off coming thick and fast – Nomura

FXStreet (Delhi) – Research Team at Nomura, suggests that the relatively low bar set for liftoff by the FOMC, coupled with strong data on labor markets and domestic activity, makes a December liftoff highly likely, in our view.

Key Quotes

“The advance estimate of Q3 GDP confirmed our call for growth to slow to 1.5%, largely due to weak business investment and inventory drag. We continue to expect second-half growth near 2%. Beyond that, we expect GDP to move above 2% for several quarters before winding down closer to potential growth.”

“There are several headwinds that should weigh on growth. The renewed decline in crude oil prices will likely hold down business investment in the oil and gas extraction sector for the remainder of 2015 and early 2016. Also, our estimates suggest that the changes in the value of the dollar and, to a lesser degree, weaker foreign growth prospects, will have a long-lasting effect on GDP growth through their impact on net exports.”

“On the upside, consumer activity has been better than expected this year and will likely continue to be the main source of growth in the near term, offsetting some of the weakness in the industrial and trade sectors. In addition, we expect residential investment to remain steady and contribute positively to growth over the outlook.”

“The October employment report showed that nonfarm payrolls increased by 271k, making up for the significant shortfall in the previous two months. The strong number sets a relatively low bar for a +200k monthly average job gains in Q4. But further out in the outlook, we expect nonfarm payrolls to ratchet down as growth returns closer to potential.”

“We expect the drag from the stronger dollar and lower oil prices to dissipate in coming quarters, and inflation should return closer to 2% by the end of next year. As the output gap narrows, we expect core inflation to also trend higher.”

“Taking all of this into account, we now think that the FOMC will raise rates for the first time at its December meeting. We expect three rate hikes between now and the end of 2016 and an additional three hikes in 2017.”
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