Having come off the back of the worst week for stock markets since August last week, equity markets remained under pressure yesterday as crude oil prices continued to be front and centre of market price action dropping to new multi-year lows in the US to their lowest levels since 2009, below $35 a barrel, though a late rally in the US did prompt a rebound off the lows.
Brent prices also slid in similar fashion but have thus far have held above their 2008 lows, but nonetheless the weakness in commodity prices shows no signs of abating despite the weekend improvement seen in the latest November Chinese economic data.
With the Federal Reserve FOMC now in blackout ahead of the beginning of its latest meeting which starts today, oh to be a fly on the wall as policymakers look to make sense of the decline in oil prices seen since the last meeting in October, as well as discussing the possible long term repercussions of China’s move to valuing the yuan on a much more trade weighted basis against a basket of currencies.
While financial markets have come to the conclusion that a rate hike this week is a done deal, this last meeting of 2015 is likely to be a particularly heated one, and unanimity is likely to be quite difficult to achieve, which means tomorrow’s decision is likely to see some significant fallout whatever happens, which means we shouldn’t rule out a surprise “hold”, even if it seems a remote possibility.
We hear all lots of guff from central bankers about how declines in energy prices are transitory yet the declines being seen right now have been going on for 18 months now. Since the last Fed meeting alone Brent oil prices have declined over 22%, while US prices have dropped over 24%, not to mention the fact that the latest US ISM manufacturing index has slipped into contraction.
Against this backdrop today’s US CPI numbers for November are likely to act as a particularly noteworthy footnote. Expectations are for no change to the monthly number, while the year on year number is projected to rise from 0.2% to 0.5%, while core prices are expected to have risen to 2% from 1.9%.
Both of these numbers appear optimistic in the extreme given that since last November last year US oil, natural gas and gasoline prices have fallen 55%, 59% and 42% respectively, which begs the question is where is this inflationary pressure coming from?
Here in the UK the Bank of England is the complete polar opposite of the hawkish Federal Reserve where expectations of a possible rise in rates appear as far off as ever. While the Fed is itching to pull the trigger on a rate rise this week the MPC here are much less keen and for good reason given that inflation is similarly weak.
Today’s November CPI numbers are expected to nudge up slightly from -0.1% in October to 0.1%, with RPI also expected to pull up from 0.7% to 0.9%. Core prices are also expected to nudge higher to 1.2%, however producer prices are still set to remain stuck in negative territory to the tune of -12.4%.
In Europe the recent improvement in economic data, helped by a lower euro and energy prices is expected to provide a boost to the latest German ZEW investor survey of economic expectations for December. A note of caution is needed here, despite the improvement in the economic picture given that the DAX has slid sharply during the same period, which could well act as an anchor on this particular measure. An improvement is expected from 10 to 15.4, but given recent DAX weakness I wouldn’t rule out a downward surprise.
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