Broad Financial Market Adjustments Intensify in Wake of FOMC Meeting

December 15, 2016

The dollar gained overnight by another 2.0% against the Australian dollar, 1.5% versus the euro, 1.6% vis-a-vis the kiwi, 1.2% relative to the yen, 0.9% against sterling, and 0.6% versus the yuan. Key levels are being approached such as parity with the euro, 120 yen, and 7 renminbi. Throughout the 8-year Obama stewardship, Republicans fought tooth and nail to prevent fiscal stimulus but are now backing such with a president from their own party. At the same time, the Fed has signaled a slightly steeper likely rise of its interest rates during 2017, while other central banks around the world are either standing  pat or biased toward easing further.

There’s been a further big  move from bonds into stocks.

  • 10-year sovereign debt yields rose another 11 basis points in the U.K., 6 bps in Germany, 4 bps in the United States, Canada and Switzerland and 3 bps in Japan.
  • Asia initially followed the post-FOMC slide of U.S. stocks, dropping 1.9% in Hong Kong, 0.8% in Singapore, and 0.7% in China. Likewise, stocks dropped 0.8% in Australia and 0.7% in New Zealand.
  • But stocks turned up in Europe, with gains so far of 1.2% in Germany and 0.8% in Britain. In U.S. trading, the DOW has climbed 0.7% and is nearing the 20K barrier.

Comex gold sank 3.1% to $1,127.10 per ounce. WTI oil also skidded, with a loss so far of 1.4% to $50.32 per barrel.

Several central banks left policy stances unchanged, a contrast with yesterday’s 25-basis point hike of the federal funds target.

  • Indonesia’s 7-day reverse repo rate was kept at 4.75%.  Monetary officials there are watching global risks.
  • The Bank of Korea’s record low 7-day repo rate was retained at 4.0%. In addition to the global uncertainties faced by everybody, there is an impeachment process underway of President Park.
  • The Bank of Norway’s Executive Board kept its key interest rate at 0.5%. There was a 25-bp reduction last March plus 50 bps of easing in 2015, a 25-bp cut in 2014, a 25-bp cut in 2012 and a 50-bp reduction in December 2011 from a 2.25% level at that time. Growth has been a bit stronger than assumed in Norway, but inflation is subdued. However, a hot housing market is a concern. It doesn’t look like the 0.5% rate level will be changed for considerably longer.
  • The Bank of England’s monetary policy parameters were retained. They include a 0.5% interest rate, a GBP 435 billion sovereign debt purchase plan limit, and the intention to buy 10 billion pounds of corporate bonds. The Monetary Policy Committee is watching the post-Brexit vote evolution of demand, supply, sterling and inflation, and remains non-committal regarding the direction of its next policy change.
  • The Swiss National Bank retained an overnight sight deposit target of negative 0.75%, halfway between the 3-month Libor corridor of -0.25% to -1.25%. Officials reiterated the view that the franc is significantly overvalued and promised to intervened as needed to mute upward pressure.

Th following preliminary purchasing manager survey results for December were reported.

  • Euroland’s composite PMI reading of 53.9 matched the 11-month high of November. The data are consistent with fourth-quarter GDP growth of roughly 0.4% not annualized.
  • Germany’s composite PMI was 54.8 after 55.0 the month before, with manufacturing at a 35-month high but services dropping to a 3-month low.
  • France’s composite PMI reached an 18-month high of 52.8 this month, with manufacturing lifting to a 67-month high and services dipping to a 3-month low.
  • Japan’s manufacturing PMI rose 0.6 points to an 11-month high of 51.9.
  • A U.S. manufacturing PMI compiled by Markit Economics edged up 0.1 point to a 21-month peak of 54.2.
  • New Zealand’s manufacturing PMI slipped back 0.8 points to 54.4 in November.

Several U.S. economic indicators were released today.

  • The Empire State and Philly Fed manufacturing indices each climbed strongly in December. The Empire State index for New York rose 7.5 points to a score of 9.0. Such had been at -19.9 last September. The Philly fed index jumped to 21.5 from 7.6 in November and 2.0 last August.
  • The U.S. current account deficit narrowed to $113.0 billion last quarter, equal to a comfortable 2.4% of GDP, from $118.3 billion in 2Q and $131.8 billion in the first quarter of 2016.
  • U.S. consumer prices rose by an as-expected 0.2% in November, lifting the 12-month increase to 1.7% from 1.6%. Core CPI inflation stayed at 2.1%. Energy was higher than a year ago.
  • Real weekly earnings on-year growth slowed to 0.5% in November from 0.9% in October.
  • New jobless insurance claims stayed very low last week and averaged less than 260K per week over the  past four weeks, just as such did over the 12 weeks through November 12.

British retail sales volume rose 0.2% on month and 5.9% on year in November, beating analyst expectations.

Australian labor statistics in November also beat expectations. The unemployment rate edged up 0.1 percentage point to 5.7%, but jobs grew 39.1K, twice as much as predicted.

Canadian manufacturing sales fell 0.8% in October. Orders went up 0.7%, and the 1.38 ratio of inventories to sales was 0.01 greater than that in September.

Central banks in Mexico and Peru are also meeting today, and the U.S. Treasury Dept. will release capital flow data late in the day.

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

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