In a classic sign of how schizophrenic a week we’ve had, the sharp sell-off we saw on Wall Street on Wednesday went into full reverse yesterday along with a rebound in Brent oil prices. Despite posting a new 12 year low below $30 a barrel, they managed to rebound back higher again, in the process managing to post its first positive day of 2016.
This sharp turnaround came largely as a result of a failure of crude prices to push below the $30 a barrel mark with any conviction, as well as slightly less hawkish comments from St. Louis Fed President James Bullard, where he expressed concern that the drop in inflation expectations was starting to “become worrisome.” This was particularly significant given that Mr Bullard is now a voting member on the FOMC this year and was one of the more vocal voices arguing for a rate rise last year, and as such does mark a significant change in tone. In this context it also might suggest that the prospect of further rate increases may have a much higher bar.
While his comments about inflation indicated a concern about the trickle down effects of lower oil prices on inflation expectations, Mr Bullard was much more effusive about the state of the US economy arguing that it was performing well due to the positive effect of lower prices should have on consumer spending.
Unfortunately for Fed policymakers there has been little evidence of that in the US retail sales and durable goods numbers that we saw in 2015.
Today’s final retail sales numbers for 2015 is likely to bookend a disappointing year for US consumers, with a decrease in December retail sales of 0.1% expected, down from 0.2% in November. This is a disappointing result given the fiscal boost lower oil and gasoline prices have given to the US consumer over the last 12 months. Over the calendar year this would mean an overall gain of 2.3%, and compares poorly with the UK’s 5.5% rise.
As a result of the turnaround overnight there is a chance that we could see markets in Europe finish the week on a positive note, as we look to a positive open today, and more to the point finish the week in positive territory, though a weak Asia session has seen some of the positive momentum from last night’s US rally dissipate led by markets in China, after the latest lending data showed a sharp slowdown in the amount of new loans in December to 597.8bn yuan from yuan 708.9bn.
Over the past few days and weeks the pound has had a pretty torrid time falling sharply against nearly all of its G10 peers as interest rate rise expectations get pushed further out into the end of 2016, due to the weakness being seen in some of the most recent economic data.
Yesterday’s monetary policy decision from the Bank of England and meeting minutes showed that MPC members were finding it increasingly difficult to judge the degree of inflationary pressure in the economy, and that the outlook for business activity had declined somewhat since the November projections.
Despite the softer outlook there was some relief that the recent softness of the data hadn’t prompted a change of position from the only hawk on the MPC, however next month’s inflation report is likely to be a key benchmark on how the Bank of England sees the glide path for the economy and rates, in light of the events of the past few weeks as well as recent comments from the UK Chancellor that consumers need to prepare for higher rates.
Away from the Fed and the Bank of England the latest minutes from the European Central Bank showed a bank split down the middle on how much extra stimulus was needed to support the economy in Europe. What was particular noteworthy was some comments from one unnamed official in separate comments, reported by Reuters, that the “ECB has done its job, created the space with exceptional accommodation. Now it's time for others to do their job”. Given these divisions expectations of significant further stimulus from the ECB in the coming weeks may well be wide of the mark.
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