The FOMC (the federal reserve’s open committee) meets for the final time this year on Wednesday. The expectation, courtesy of the analysts polled, is for a unanimous FOMC agreement to raise USA base rates by 0.25%, representing the first (and last) interest rate rise in 2016. The general consensus and prevalent accepted wisdom, is that the USA economy is now robust enough to accept a small rise on the basis that; inflation is creeping up, wage rises are consistent, employment levels are strong, unemployment is below 5%, retail sales are robust, consumer confidence is high and the dollar is strong versus it’s major peers; sterling, euro and yen. Moreover, there has been a significant post presidential election boost to equity markets. Therefore any fall in equities would be modest if rates were to rise by such a small percentage and any rise to the dollar would be modest.
If, as anticipated, the modest base rate rise is a slam dunk, then attention may turn to the post meeting press conference for what’s termed “forward guidance” comments, which Fed chair Janet Yellen may disclose. Will she suggest this initial rise signals a programme of modest rises throughout 2017, will it be experimental and likely reversed at the first sign of negative economic turbulence, what overall view does the Fed have of the USA economy?
Naturally traders must remain vigilant to the potential market volatility on Wednesday as the Fed decision is revealed, however, it would also be wise to consider a surprise element. If the Fed are convinced by the robustness of the USA economy they could raise by a shock 0.5%, or a fairly random figure; between 0.25%-0.5%. Moreover, it can’t be assumed that the dollar will automatically rise, or equities fall as a consequence of a rise, however modest that rise may be. Finally the Fed may actually postpone a rise.
OPEC convinces non OPEC members to cut oil production.
Saudi Arabia, who alongside Russia are the two leading global oil producers, has been insistent that non OPEC producers support its efforts to reduce production. In meetings two weeks back OPEC agreed to reduce its own production by 1.2 million barrels a day. During meetings that also took place in Vienna over the past weekend, apparently Russia has now pledged to cut output by 300,000 barrels a day next year, down from a 30-year high last month of 11.2 million barrels a day. Mexico has agreed to cut 100,000 barrels, Azerbaijan by 35,000 barrels and Oman by 40,000 barrels.
Saudi Arabia is trying find a support level for oil price above $60 a barrel in a desperate attempt to shore up the fiscal black hole which has emerged in its domestic budget as oil prices have collapsed; the Kingdom of Saudi Arabia needs prices at circa $100 a barrel (medium to long term) in order to balance its budget. A partial floatation of Saudi Aramco, the state owned oil company, may also raise much needed funds from foreign investors, helping reduce the deficit from circa 15% to a reversion of the mean of circa 1.5%, or a surplus. The move towards higher prices may backfire, however, as it risks the resurgence of U.S.A. shale drilling from Texas to North Dakota.
The European Central Bank’s policy decision last week, regarding further quantitative easing until the end of 2017, is reinforcing views that the euro will drop to parity against the dollar. The odds of the euro weakening to $1 over the next six months have now risen to circa 44 percent, from 31 percent on Dec. 7th, the day before the ECB decision, options prices are indicating. The euro dropped to $1.0506 on Dec. 5th, the lowest level witnessed since March 2015. It was last below $1 in December 2002.
Shortly after markets opened on Sunday evening, as a consequence of the agreement reached by many of the oil producing nations, WTI oil futures spiked up to reach over $54 a barrel. Correspondingly futures in the SPX and DJIA rose sharply, suggesting that record highs will once again be reached on the main USA equity markets once New York opens Monday afternoon. The dollar fell versus its main commodity current peer, the Canadian dollar.
Economic calendar highlights for the coming week include the following:
Several nations report their benchmark industrial production figures during the week. After UK data showed a fall in output in October, China reports its November figures on Monday, Eurozone figures are due on Wednesday.
USA inflation expectations have risen as bond yields have risen and equities have also risen on hopes of higher domestic infrastructure spending that will boost growth. USA inflation figures are published Thursday, German and UK figures are published Wednesday.
Bank of England
Mark Carney warned of a “lost decade” last week for the UK. The Bank is due to make its monetary policy statement on Thursday, there is little expectation of a base rate adjustment given the emergency reduction shortly after the Brexit referendum decision.
Economic Calendar; London times
Sunday, 11th December
23:50 – Japan corporate goods price index, machinery orders
Monday, 12th December
02:00 – China industrial production
Tuesday, 13th December
00:30 – Australia house price index
07:00 – German inflation data
09:00 – Italy industrial production
09:30 – UK inflation data
23:50 – Japan Tankan manufacturing and non-manufacturing indices
Wednesday, 14th December
09:30 – UK unemployment, average earnings
10:00 – Eurozone industrial production
13:30 – US retail sales, PPI inflation
15:30 – US crude oil inventories
19:00 – Federal Reserve interest rate decision, press conference
Thursday, 15th December
00:30 – Australia unemployment rate
08:00 – French flash manufacturing and services PMIs
08:30 – German flash manufacturing and services PMIs
08:30 – Swiss National Bank interest rate decision and press conference
09:00 – Eurozone flash manufacturing and services PMIs
09:30 – UK retail sales
12:00 – Bank of England interest rate decision, monetary policy statement
13:30 – US CPI inflation, Philly Fed manufacturing index
16:15 – Bank of Canada governor Poloz speech
Friday, 16th December
10:00 – Eurozone final CPI inflation
13:30 – US building permits, housing starts data