A Day to Remember

December 16, 2015

The Federal Open Market Committee is expected to raise the federal funds rate later today.  Such will be the first increase since a hike to 5.25% from 5.0% in June 2006 ended a sequence of 17 straight meetings in which the key policy rate was lifted by 25 basis points.  The main uncertainty to be learned from today’s start to rate normalization is not so much the  precise path that the Fed chooses to get from point A to point B but rather how well the U.S. and global economies handle this medicine.  From a starting point now of 0.25% to 0.50% on the funds rate is not very meaningful and hardly different than a 50-basis point increment to 0.75%.  The latter is not going to happen, of course, although it would be my personal choice.  The danger posed by raising the funds rate slightly from a an ultra-low base is not embodied in the change to short-term rates but rather in the market acceptance of the decision, which will be seen in how longer-maturity yields and the stock market responds.  By going 50 basis points instead of 25 bps, Fed officials could silence the inevitable guessing game about the timing of a second rate hike at least for a while.  By neutralizing a psychology that will transition to what next mode, a 50-bp move probably would constrain any fear factor in the wake of today’s events.  Moreover, a 50-basis point initial rate increase would give policymakers a quicker sense of whether the U.S. economy and global investors are ready for rate normalization.

U.S. data released this morning were mixed.  Housing permits in November leaped 11.0% on month and 19.5% on year to their greatest level in more than a year, while housing starts advanced by 10.5% on month and 16.5% on year. On the other hand, industrial production sank 0.6% in November, three times the expected drop and the third decline in a row.  Capacity usage slipped 0.5 percentage points to 77.0% last month.  The manufacturing purchasing managers index compiled by Markit Economics fell 1.5 points to 51.3 in December, which was more than a full point below street predictions.

The dollar fell overnight by 0.6% against the Swiss franc but rose 0.5% versus the Canadian dollar.  Other changes in the U.S. currency have been slight, including zero change in the key EUR/USD relationship.

Among commodities, West Texas Intermediate crude oil fell back 1.7% to $36.73 per barrel, while Comex gold went up 1.3%.

The yields on 10-year German bunds and British gilts are unchanged.  The 10-year U.S. Treasury yield and Japanese JGB are respectively two and one basis points higher.

U.S. share prices rose about 0.5% in the first hour of trading.  Earlier in the Pacific Rim, stocks closed up 2.4% in Australia, 1.9% in Hong Kong, 2.6% in Japan, 1.4% in Taiwan, 1.7% in Indonesia, 0.9% in Singapore but barely changed in China.  The German Dax and Paris Cac are 0.7% firmer.  Equities have risen 0.4% in Switzerland and Spain but just 0.1% in Great Britain.

Preliminary purchasing manager surveys for the eurozone, Germany and France for December are consistent with fourth-quarter GDP growth in those economies of about 0.4%, 0.5%, and 0.25%, respectively.  Euroland’s composite 54.0 score, although at a 2-month low, still produced the strongest quarterly average in 4-1/2 years and embodied a 20-month high in the manufacturing component.  France’s composite PMI of 50.3 is a 4-month low and implies a near total stagnation as the year drew to a close.

The Swiss ZEW expectations index, a measure of investor sentiment improved to a score of 16.6 in December from zero the month before.

Euroland recorded a EUR 19.9 billion seasonally adjusted trade surplus in October, identical to September’s result. Exports and imports each rose marginally between September and October.  The unadjusted surplus of EUR 199.7 billion in January-October was 42% wider than a year earlier, as 5.4% growth in exports surpassed a 1.9% rise in imports.

Euroland CPI data for November were revised upward to show a 0.1% monthly dip overall instead of -0.2% as reported initially and an on-year 0.2% pace instead of 0.1%.  The on-year increase had been 0.1% in October and 0.3% in November 2014.  However, core inflation slowed to 0.9% in November from 1.1% in October, and the 12-month drop in energy costs narrowed to 7.3% from 8.5%.

British labor statistics got released.  The claimant count of unemployed workers went up 3.9K in November, more than  expected or than the October total.  The ILO-basis jobless rate in August-October was 5.2%, considerably above forecasts.  Average weekly earnings growth including bonus money of 2.4% on year during August-October was down from 3.0% in the third quarter and below market expectations.  Regular pay grew 2.0% in the year to August-October.

The Bank of Thailand left its policy interest rate unchanged at 1.5%, its level since late April, and cited uncertainty caused by the divergence of monetary policies among major advanced economies.

The Czech National Bank’s monetary policy settings were not changed either.  The 2-week repo rate stays at 0.05%, and a one-sided currency policy continues to use intervention to prevent the koruna from strengthening beyond the 27 per euro level.

Japan’s factory purchasing managers index dipped 0.1 point to 52.5 in December, a 3-month low.  Japanese machine tool orders posted a revised 17.7% on-year drop in November.  The decline was initially estimated as 17.9%, and the drop in October had been by 22.9%.

New Zealand’s current account deficit narrowed to NZD 1.75 billion last quarter, equal to 3.3% of GDP, from NZD 2.1 billion (3.4% of GDP) in 2Q15.

Westpac’s index of leading Australian economic indicators fell 0.2% last month after a 0.1% uptick in October.

Brazilian retail sales fell 5.6% between October 2014 and October 2015.

Austrian consumer prices were 0.6% higher than a year earlier in November, while core Polish consumer prices edged 0.2% higher in the same span.

The Republican presidential candidate debate on Tuesday night didn’t settle much.  Trump, who leads polls, didn’t do especially well, but that hasn’t hurt his ratings before.

The FOMC statement and new forecasts will be released at 19:00 GMT.  Janet Yellen holds a press conference from 19:30 GMT to 20:30 GMT.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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