Friday December 4, 2015 - 17:39:23 GMT
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WEEK AHEAD: ECONOMIC DATA ANALYSIS
Friday 4 December 2015
US EMPLOYMENT REPORT CEMENTS RATE EXPECTATIONS
Strong US November employment report supports market expectations for Fed hike
Markets hope ECB speakers will provide more clarity on euro area policy outlook
UK Monetary Policy Committee to maintain policy stance
US payrolls data reinforce expectations of a FOMC December hike.Today’s stronger-than-expected November employment report has, along with recent statements by FOMC members, further buttressed the market view that the Federal Reserve will announce the first US policy rate hike since June 2006 at its next meeting which is now less than two weeks away. Indeed, the FOMC appears to be looking past this and focussing more on the trajectory of subsequent rate rises. Several Committee members, including Chair Yellen and Governor Brainard, have recently delivered strong hints that, despite the solid momentum of the domestic economy, several factors, including the strong dollar, which has risen by around 10% on a trade-weighted basis so far this year, still tepid inflation and downside risks to the global economy point to a much more gradual tightening cycle than in the past. Next week’s figures on China’s November international trade (Tue) and CPI (Wed) should provide some reassurance that the midsummer fears of a hard Chinese landing are unlikely to transpire. Meanwhile, Friday’s retail sales figures for November are expected to reinforce the positive mood about internal activity with headline sales expected to strengthen to 0.4% m/m from 0.1% in October.
Draghi’s credibility takes a hit?Against a backdrop of previous bouts of aggressive policy delivery in excess of market expectations and persistently strong hints by President Draghi about the importance of raising euro area inflation as quickly as possible, yesterday’s policy loosening by the ECB greatly disappointed. For example, the trade-weighted euro, which had fallen by nearly 4% in the period between Draghi’s 22nd October pronouncement that an easing of monetary policy was being considered and yesterday’s meeting, has subsequently retraced by around 1.75% while the Euro Stoxx index has fallen back by 4%. In addition to the unexpectedly meek loosening, the sharp reactions also reflected President Draghi’s inability to convincingly explain the underlying reasoning for the decision. This has led to speculation that he may have been unable to convince a majority of the Governing Council about the wisdom of a more extensive round of measures than the 10bps reduction in the deposit rate, six-month extension to the QE programme and the addition of regional and local bonds to the pool of eligible assets. With this in mind, markets will be hoping that upcoming speeches by several Council members including Constancio (Mon), Nowotny (Wed), Weidmann, Liikanen and Coeure (all Thu) shed more light on the contours of the debate as well as the prospects for further action over the coming months. Otherwise, it is a quiet week for euro area data with German industrial production growth in October (Mon) expected to move back into positive territory and Q3 GDP (Tue) unchanged from its preliminary 0.3% q/q print.
All quiet at the Bank of England.With most of the post-November Inflation Report data falling into line with BoE expectations, next week’s MPC meeting is expected to see both the 0.5% policy rate and 8-1 voting pattern unchanged. Otherwise Tuesday’s October industrial production release is expected to show a further contraction on the month, although this should be tempered by a slight recovery in construction output (Fri).
Global activity trends still bear watching.The ECB’s decision to deploy less stimulus than expected left the EURCHF stronger but close to its average over the last two months. Consequently the SNB should be less inclined to cut the deposit rate again, especially since CPI inflation, at -1.4% y/y looks close to bottoming out.
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