World Week Ahead: Finally, it's Fed week

Monday 14th December 2015

The US Federal Reserve’s two day meeting and a widely anticipated interest rate increase will form the key driver in the coming days as investors eye clues about the projected pace of future hikes.

Earlier this month a Labor Department showed a higher than expected gain in non-farm payrolls in November, which held the unemployment rate 5.0 percent, the lowest level in more than seven years. The Federal Open Market Committee concludes a two day meeting on Wednesday, which will be followed by a press conference by chair Janet Yellen.

Economists are betting on a quarter of a percentage point lift following the meeting. While it would be the first upward tweak since 2009, investors are especially keen for guidance on future moves.

"If...(policymakers) came out saying that over the next two years they will raise by 'this' much, that would be very destabilising," Brian Battle, director of trading at Performance Trust Capital Partners in Chicago, told Reuters. "The market will take great relief in the Fed communicating it will be very patient for the next increase."

Some 90 percent of economists in a recent Reuters poll predicted the federal funds rate would be boosted by one quarter of a percentage point, taking it to 0.25-0.5 percent.

Ahead of the policy change, financial markets have slumped along with the price of oil amid accelerating concern about the unchecked global glut. Brent crude’s drop on Friday to the lowest level in seven years did not help sentiment on stock markets as it’s bound to make life even harder for energy companies.

“Companies must repeat the same size of cuts they’ve already announced to be able to cope with oil prices this low,” Alexandre Andlauer, a Paris-based oil industry analyst with AlphaValue SAS, told Bloomberg. There will be “further layoffs to come with oil at US$40 a barrel.”

Last week, the Dow Jones Industrial Average dropped 3.3 percent, the Standard & Poor’s 500 Index shed 3.8 percent, while the Nasdaq Composite Index sank 4.1 percent.

“About 10 percent of the S&P 500 is energy and commodity related, and it is a barometer for the global economy,” Art Hogan, chief market strategist at Wunderlich Securities in New York. “When you see such a plunge, it worries investors.”

US data slated for release in the coming days include the consumer price index, Empire State manufacturing survey, and the housing market index, due Tuesday; housing starts, industrial production, and the PMI manufacturing index, due Wednesday; weekly jobless claims, Philadelphia Fed business outlook survey, and leading indicators, due Thursday; and PMI services, Atlanta Fed business inflation expectations, and the Kansas City manufacturing index.

Also on Friday, Richmond Fed President Jeffrey Lacker will take part in a panel discussing the economic outlook, in Charlotte, North Carolina.

Over the weekend reports showed the latest data from China—industrial production, retail sales and fixed-asset investment—were better than expected, which might offer some relief.

The data showed that industrial output increased 6.2 percent in November from a year earlier, retail sales jumped 11.2 percent, while fixed-asset investment climbed 10.2 percent in the first 11 months of the year.

In Europe, the Stoxx 600 Index dropped 2 percent on Friday, bringing its decline for the week to 4 percent.

The European Central Bank’s decision to expand stimulus earlier this month had initially disappointed some investors who had bet on even more aggressive measures than those announced.

“Although everyone is expecting a rate hike from the Fed [this] week, a lot of questions remain about the future of monetary policy,” Francois Savary, chief investment officer at Geneva-based investment management firm Prime Partners, told Bloomberg.

“You currently have one central bank in a tightening cycle, and the other can’t actually deliver on expectations,” Savary added. “The ECB’s disappointment last week showed that [President Mario] Draghi’s hands are tied. That’s why investors are so unsettled now.”

Here, the latest data this week include euro-zone industrial production, due today; Germany’s and eurozone ZEW sentiment, due Tuesday; eurozone manufacturing PMIs, eurozone trade balance, and eurozone consumer price index, due Wednesday; and Germany’s IFO, due Thursday.

Today’s release of the Tankan survey in Japan will also be closely watched.

BusinessDesk.co.nz

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