Markets Comfortable with Tomorrow’s Likely Fed Tightening

December 13, 2016

Stocks have risen in Asia, Europe and North America.

Ten-year German bunds and British gilt yields are down three basis points. The 10-year JGB yield edged a basis point lower, and the 10-year Treasury is steady.

Oil is trading firmly at $52.75 per barrel, albeit down 0.2% from Monday’s close. Gold declined 0.7% to $1,157.70 per ounce, which is consistent with the prevailing risk-on mood.

The dollar is steady relative to the euro, Aussie dollar and loonie. It’s up 0.1% against the yen, peso and sterling but down 0.2% vis-a-vis the Swiss franc and 0.1% against the yuan.

Markets continue to disregard the contentious U.S. political atmosphere. President-elect Trump has nominated Exxon CEO Tillerman as Secretary of State, solidifying the nascent U.S.-Russian alliance. Republican lawmakers are uneasy with this budding cozy relationship.

Chinese industrial production grew 6.2% on year in November, edging marginally higher to a 3-month high.

Chinese retail sales advanced 10.8%, the largest 12-month increase since last December and up from 10.0% in the year to October.

Chinese fixed asset investment over the first 11 months showed an on-year rise of 8.3%, same as in January-October but down from 10.0% in full-2015.

The ZEW Center for Economic Research released investor sentiment indices covering December for Germany and Euroland. Although the German ZEW expectations index stayed at 13.8, current conditions continued to improve and printed at 63.5 following readings of 58.8 in November and 49.8 as recently as July. The expectations index of the whole euro area was 18.1, up from 15.8, and this rise was accompanied by a one-point climb in current conditions to -8.3. In commenting on the results, ZEW officials said, “economic risks arising from the tense situation in the Italian banking sector, as well as the political risks surrounding upcoming elections in Europe, seem to have faded into the background for the moment.”

German wholesale price inflation accelerated to 0.8% in November from 0.5% in October and negative territory previously. The WPI had fallen 2.3% in the 12 months to last May, for instance.

German final consumer price data for November confirmed the flash estimate. Consumer prices rose 0.1% on month and 0.8% on year, which was the same 12-month increase as the 2-year high posted in October. Energy fell 1.2% on month, but non-energy’s 12-month increase accelerated to 1.2% from 1.1%.

Employment growth in the euro area last quarter was 0.2% from 2Q and 1.2% on year. Jobs climbed 2.8% on year in both Ireland and Spain but just 0.3% in France.

British consumer price inflation increased 0.3 percentage points (ppts) to a 25-month 1.2% in November. Core CPI inflation ticked up 0.2 ppts to 1.4%. Retail price inflation was 2.2 and at 2.5% excluding mortgage interest payments. Producer output inflation accelerated to 2.3% from 2.1%, and producer input price inflation was 12.9%, up a half percentage point. Sterling’s post-referendum depreciation is feeding inflation.

House price inflation according to the British Office of National Statistics slowed to 6.9% in October, lowest so far this year and down from 7.0% in September, 7.7% in August and 8.7% in June when the Brexit referendum was held.

In the year to November, consumer prices rose 1.4% in Sweden, most since March 2012, 0.7% in Spain, same as the 12-month pace in October, and 0.6% in Portugal, down from a 0.9% rise recorded in the year to October. Core CPI inflation in Poland slid 0.1%.

Italian industrial production was flat in October, which reduced its 12-month increase to 1.3%.

Business confidence in Australia printed at +6 in November, the third such reading in the past four months after dipping to +4 in October. Business conditions slipped to +5 from +7 in October, +8 in September, and a 2016 high of +12 last March. New house prices in Australia rose 1.5% on quarter but recorded a lower on-year increase of 3.5%.

Small business sentiment in the United States according to the NFIB index exceeded street estimates with a reading of 98.4 in November, up from 94.9 in October. This was the best score of the year and compares to a 2016 lowpoint of 92.6 last March.

U.S. import prices slid 0.3% on month and 0.1% on year in November. Fuel recorded a 12-month rise of 2.7%, quite a turnaround from a 44.3% on-year decline in November 2015. Export prices slid 0.3% on year compared to a 6.5% drop in the previous twelve months to November 2015.

Brazilian retail sales posted a larger-than-expected 8.2% decline in the year to October.

Japan’s quarterly BOJ Tankan survey of corporate expectations and conditions gets released Wednesday, and the FOMC is universally expected to raise the fed funds target range by 25 basis points. Only way Fed officials could surprise would be to hike by 50 basis points or to indicate that a move of such size had been considered.

Copyright 2016, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


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