The 2017 Oil-Led U.S. Factory Rebound is Already Underway

21 December, 2016

European Outlook: Asian stock markets moved mostly higher overnight after gains on Wall Street and in quiet trade. Japan was a notable exception and the Nikkei closing with a -0.26% loss as the Yen bounced back and strengthened across the board. The DAX tested the highs for the year today and U.S. indices also saw record levels, despite attacks in Ankara and Germany adding to global risks. Stock futures are looking a bit more cautious this morning, with U.S. futures narrowly mixed and the FTSE 100 future in negative territory. Oil prices are higher on the day and the front end WTI future is trading at USD 53.56 per barrel and Gold trades at USD 1135 per troy ounce. Markets are settling into the holiday period and lower trading volumes could exaggerate moves but core yields moved higher again yesterday as stocks remained underpinned and if stock markets get more cautious could see bond futures recovering some losses. The European data calendar has U.K. public finance data and preliminary Eurozone consumer confidence data.

US VIX: U.S. VIX equity volatility sank 1% to the 11.60 area compared to its very tight 11.50-11.74 session range. The VIX has yet to take out its lows of the year of 11.02 set on August 9, 2016, after a couple of near misses in December. Perhaps a break through/close 20k in the Dow and 2.3k in the S&P 500 will be the awaited trigger, but stocks are veering away from fresh highs again now and the VIX is rebounding toward unchanged. A break below 11.02 would put sights on life lows of 8.20 market on July 4, 1994. Look like a cat and mouse game between funds and algorithms to ride the momentum trade into year-end.

Fedspeak: SF Fed’s Williams said risks are shifting away from weakness, in a New York Times interview. Though Williams has been a long-standing dove, he has been increasingly mindful of the improved labor market, the general rise in growth, as well as the pick-up in inflation, which has shifted his stance slightly toward the center. Indeed, he admitted that while there are “a lot of uncertainty over what policies are going to be enacted” by the Trump administration, his views on “risks to the outlook have shifted a little.” Previously his stance had been “balanced and if anything a little bit to the soft side.” The potential for fiscal stimulus and other changes should shift risks to the outlook “a little bit to the right…but it’s not a big effect.” The decision to hike rates last week “stands on its own” and was “wholly” based on data. His underlying view is broadly consistent with the central tendency of the Committee, looking for moderate growth and inflation moving toward 2%. Of interest, he noted there’s a negative feedback loop when all major banks are at the zero bound.

The 2017 Oil-Led U.S. Factory Rebound is Already Underway: The U.S. factory sector is poised for a recovery into 2017 that is already taking shape, with an election lift alongside an emerging reversal of the massive GDP inventory hit that accompanied the 20-month downswing in oil prices through last February. The mining sector is lifting industrial production beyond a temporary weather-led plunge in utility output, producer sentiment is rising with spikes in planned capital spending, stock prices and consumer confidence are soaring, and inventory to sales (I/S) ratios are falling as prices and demand rebound.

Main Macro Events Today                

U.S. Existing Home Sales –  November existing home sales data is out today and should reveal a 0.4% increase to a 5.620 mln (median 5.540 mln) pace from 5.600 mln in October and 5.490 mln in September. NAHB sentiment in November was steady from October at 63 before bouncing to 70 in December.

NZD GDP – Year on Year GDP in New Zealand is expected to tick up to 3.7% form 3.6% last time with Quarter 3, Quarter on Quarter growth unchanged at 0.9%. The current account GDP ratio is also expected to increase but only marginally to -3.0% from -2.9%.

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