World Week Ahead: Rate pace focus

Monday 7th December 2015

While a better than expected jobs report all but confirmed a US interest rate increase this month, investors this week will eye a speech by St Louis Fed President James Bullard as well as a report on American retail sales as the rate debate shifts more to the pace of tightening.

A Labor Department report on Friday showed nonfarm payrolls rose a higher than expected 211,000 in November, with the number of jobs revised higher in both September and October too. The unemployment rate held at 5 percent, the lowest level in more than seven years.

The data cemented expectations of the first Fed increase since 2006. A Reuters survey of banks that deal directly with the Fed showed all but one of the so-called primary dealers expect a rate hike at the December 15-16 meeting, followed by a gradual pace of monetary policy tightening through 2016.

Wall Street rallied on Friday. The Dow Jones Industrial Average advanced 2.1 percent, as did the Standard & Poor’s 500 Index and the Nasdaq Composite Index.

“The story today in the US is growth with modest inflation, which is great for equities,” Paul Zemsky, chief investment officer, multi-asset strategies and solutions at Voya Investment Management in New York, told Reuters. “I see nothing on the calendar outside a geopolitical event that is going to make them (the Fed) change course at this point.”

For the week, the Dow rose 0.3 percent, the S&P 500 added 0.1 percent, while the Nasdaq gained 0.3 percent.

St Louis Fed President James Bullard will speak on the economic outlook, today.

This week will offer data on consumer credit, due today; NFIB small business optimism index, due Tuesday; wholesale trade, due Wednesday; weekly jobless claims, and import and export prices, due Thursday; producer price index, retail sales, business inventories, and consumer sentiment, due Friday.

Europe’s Stoxx 600 Index shed 3.4 percent in the past five days, closing at the lowest level in three weeks on Friday. The European Central Bank’s expanded stimulus, announced last Thursday, disappointed some investors and sank both stocks and bonds.

German bunds dropped, sending yields on the 10-year bund 22 basis points higher last week to 0.68 percent.

But analysts looked on the bright side, and expect investors to follow suit.

“The ECB’s package is fine and is underscoring the fact that the policy is still expansionary,” David Schnautz, rates strategist at Commerzbank in London, told Bloomberg. “This should be supportive for bonds. The big thing about Thursday was the significant falling-short-of expectation component.”

The latest clues on the euro-zone economy will arrive in the form of reports on German industrial production, and eurozone Sentix investor confidence, due today; eurozone gross domestic product, due Tuesday; German trade balance, due Wednesday; and Germany's consumer price index, due Friday.

Central banks will remain in focus this week, with a meeting by policy makers at the Bank of England on Thursday; the BOE is expected to hold rates at a record low of 0.5 percent and maintain its 375-billion-pound asset-purchase program.

“Markets will be scrutinising the language … whether there is a possible deviation in voting patterns,” Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London, told Bloomberg.

Oil prices might suffer more in the coming days after OPEC on Friday maintained its production at current levels of about 31.5 million barrels per day, dashing hopes for a reduction in the global glut. The producer group has scheduled its next regular meeting in early June 2016.

"It shifted the market back to fears of oversupply,” Gene McGillian, analyst at Tradition Energy in New York, told Reuters.

BusinessDesk.co.nz

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