As mentioned in previous communications, the main USA equities indices have experienced the late end of year gains (the phenomenon known as the Santa Claus rally) during 26 of the past 31 years. However, given the late FOMC interest rate rise announced last week, the only rise delivered in 2016, the chances of the DJIA breaching the critical record level of 20,000 has diminished. Both the DJIA and SPX have displayed orthodox investment behaviour since the base rate rise; the dollar has risen versus all its main ten currency peers, whilst the indices have experienced a moderate pull back.
Many analysts and market commentators are also beginning to question if the dollar rise has been too strong during the latter stages of 2016. The dollar has reached its highest level versus the euro since 2003 and its highest versus a basket of currencies for circa 14 years. But there’s still many issues for the USA economy to navigate in 2017 given the new president will be inaugurated in January and he’s apparently still committed to his election pledge; the creation of a potential massive fiscal stimulus to develop infrastructure projects.
Figures of approximately one trillion dollars have been cited for this ambitious plan, therefore should this fiscal stimulus be provided as a consequence of further versions of central bank quantitative easing, as opposed to dollar repatriation exercises, then the value of the dollar could come under pressure.
An example of the potential fragility of the USA economy came in the form of the housing starts data revealed in Friday’s trading session. New home construction slumped in November after reaching a nine-year high in October. Residential building starts slumped by 18.7 percent to a 1.09 million annual rate last month, after rising to a 1.34 million pace, Commerce Department data revealed. The median projection, from analysts polled, suggested there’d been 1.23 million starts in November. Permits, another indication of future construction, also fell in November, based on fewer applications to build apartments.
The coming last trading week before Xmas, is traditionally low on high impact news events and data releases. These are the critical economic calendar events for Monday 19th December.
09:00. EUR, German IFO – Business Climate. The previous reading is 110.4, the expectation is a moderate increase to 110.7. This index is a composite index based on Germany’s surveyed: manufacturers, builders, wholesalers, and retailers. This survey is highly regarded throughout the investment community, due to its large sample size and its correlation with both German and wider Eurozone economic conditions. This data often creates a significant market impact upon release.
10:00. EUR, Euro-Zone Construction Output w.d.a. (YoY) last reading of 1.8%. This construction and activity index provides an insight into the current levels of construction activity in the Eurozone. An increase indicates that expensive construction is reflecting overall business optimism. The index is monitored as a business cycle indicator; the housing market is tied to changes in economic growth.
14:45. USD, Markit US Services PMI (DEC). The last reading was 54.6, the expectation is for a rise to 55.2. As always Markit economics readings and data are looked upon as “leading”, as opposed to being “lagging” indicators. Based on how they’re compiled, through interviewing circa 400 leading business decision makers, they provide an invaluable insight into the decisions being made now, that will help shape future economic performance.
14:45. USD, Markit US Composite PMI (DEC). 54.9. The expectation is for this composite figure to have risen marginally in line with the services PMI data. This composite figure is an overall measurement of all the recent Markit PMIs published relating to the USA economy. As always with Markit PMIs, any figure above 50 indicates expansion.