22 December, 2016
European Outlook: Asian stock markets headed mostly south overnight, following on from losses in Wall Street where the Dow is struggling to conquer the much watched 20000 mark. Japan failed to benefit from a weaker Yen and developers remained under pressure in Hong Kong and while the ASX managed to extend the year end rally to new highs, U.S. and FTSE 100 futures are also down. Oil prices are little changed, after the front end WTI future dropped below USD 53 yesterday and GOLD declined to 1130 gain overnight. While DAX and FTSE 100 remain in lofty heights, investors seem hesitant to push indices further up as markets start to settle into holiday mode and trading volumes start to thin. Yields meanwhile fell back again yesterday and while the Bund future underperformed its U.K. counterpart, it seems to have successfully broken the downtrend that was in place since late September, with the next target the area around 163.79, the high from November 28. Released overnight, U.K. Dec retail sales moved higher to -7 from -8 in Nov.
The US has a raft of data later (see below for highlights) including 3Q GDP (final revision) Durable Goods, both these key data releases at 13:30 GMT. Also today there is Spending, Income and Consumption data as well as Initial Jobless claims for the week. Canada also releases CPI and Retail Sales.
German Import Price Inflation: Jumped to 0.3% y/y from -0.6% y/y in the previous month, much higher than expected and driven mainly by a sharp turnaround in energy and basic goods prices as well as a renewed rise in prices for agriculture, forestry and fishing. Energy price inflation jumped to 0.9% y/y from -2.2% y/y in the previous month and basic goods prices were also up 0.9% y/y, after still falling -0.8% y/y in November. As predicted inflation rates are rebounding quickly as negative base effects from energy prices are falling out of the equation and with the weakening of the EUR against the dollar adding to upward pressures. Deflation is not longer an issue and in Germany the risk of overshooting headline inflation is rising as the labour market remains very tight.
Fed policy Outlook: The dot-plot suggests 3 rate hikes next year. And that’s a good first approximation with most in the markets projecting that trajectory too. But, the risk might be to fewer, especially as the Fed only hiked once this year, versus the 4 in the dot-plot. Fed policy action is unlikely to begin as soon and probably not until late Q2 at the earliest. Our forecasts show growth slowing to the mid 1.0% region next quarter, and it’s unlikely any significant Trump effect will be seen until the second half of 2017. Meanwhile, although inflation has picked up in recent months, thanks in large part to the rebound in oil, the bounce in energy prices may not be sustained if U.S. production kicks in again. Also, the dollar is likely to remain firm amid diverging central bank actions, which could cap the upside. The composition of the 2017 voting Committee may limit the number size of rate hikes as well. Evans, Kashkari, Harker, and Kaplan who are coming on board, are less hawkish than the current group including Bullard, George, Mester, and Rosenberg.
US VIX equity volatility finally broke below year lows of 11.02 to mark a trend low of 10.93 earlier compared to the 11.49-10.93 session range before rebounding to 11.27. Investors are starting to turn blue from holding their breath while awaiting the break of 20k in the Dow, which may itself be stymieing the advance as the markets get a case of acrophobia into year-end after the dramatic late-2016 rally. VIX focus is now on 8.20 life lows (July 4, 1994) for those who believe that 2017 will be smooth sailing and risk free.
Main Macro Events Today
U.S. GDP – The third release on Q3 GDP is out today and expectations are for the headline to be revised up to 3.3% for the quarter. Expectations for construction spending to be revised up by $6 bln, wholesale inventories by $3 bln and consumption by $2 bln while net exports undergo a slight, $1 bln, downward revision.
US Durable Goods – November durable goods data is out today and should reveal a -4.2%) decline in orders with shipments down 0.5% and inventories up 0.1% for the month. This compares to respective October figures of 4.6% for orders, -0.1% for shipments and flat for inventories. Data in line with forecasts would leave the I/S ratio at 1.65 from 1.64 in both October and September.
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