Stock market euphoria and the Santa Claus rally continued Tuesday with the Dow, S&P 500 and NASDAQ Composite all breaking out to new all-time highs. The Dow in particular appears to have been caught in a tractor beam and seems to be being drawn toward a test of the big 20,000 round number. Indices in Europe also posted strong gains with the FTSE
gaining over 1.0% and Italy’s FTSEMIB gaining over 2.5%. The market’s outlook for the US economy and potential business friendly polices from the incoming Trump Administration remains sunny and positive for now.
Today has the potential to be a big day for trading around the world. The main event is the FOMC decision at 2:00 pm EST. Having run out of meetings and excuses to stall with the US near full employment, the economy doing well, the election over and inflation on the rise. The Fed is pretty much guaranteed to raise interest rates by 0.25%. At this point the potential negative impact of a shock decision to do nothing would far outweigh any liquidity benefits (think the reaction to the ECB one and done QE cut times ten).
This time around the member projections, statement and press conference are likely to have a bigger impact than the decision itself. Before the US election the US Dollar was pricing in two interest rate hikes in 2017 but since the election, expectations that fiscal stimulus under a Trump Administration could boost inflation has pushed the US Dollar higher and expectations up to four interest rate increases. This is a big difference and I’m not convinced Fed Chair Yellen in her last full year would suddenly turn aggressively hawkish, I can see two but think four 2017 hikes is pushing it. The controversial dot plot of Fed funds expectations could have a particularly large impact if the majority of estimates point to less than four increases in 2017.
A less hawkish than expected outlook from the Fed could spark a significant correction in the US Dollar which has been looking overbought and exhausted for a while now. A US Dollar correction could ignite markets that have been depressed lately like gold, bonds, and JPY. CAD, EUR and GBP may also benefit from a US Dollar correction. Stocks may continue to rally but the Dow 20,000 effect could cause some volatility. I remain concerned that we could see an echo of the $30 to $50 and round trip back to $30 Silver staged back in early 2011.
In the run up to the Fed we could see significant local market moves with a lot of data due from a number of countries. The quarterly Tankan business survey plus industrial production may impact trading in JPY and Japanese stocks today. Despite or perhaps because of recent JPY weakness, Japanese economic data has been improving lately heading toward a Bank of Japan meeting next week. Australia and New Zealand could be influenced by Australia consumer confidence and swings
in commodity prices.
Wednesday morning, GBP and the FTSE could be impacted by UK employment figures. A flurry of US reports including retail sales, industrial production and producer prices may be overshadowed by the Fed unless there is a huge surprise.
Crude oil and oil sensitive markets like CAD and energy stocks may be impacted by swings in the oil price around inventory reports. WTI has been dropping back this afternoon following a surprise 4.6 mmbbl increase in API inventories. The street is currently expecting a 1.2 mmbbl drawdown for crude in tomorrow’s DOE report and a 2.0 mmbbl increase for gasoline.
There have been no major announcements after the US close today.
Significant announcements released overnight include:
US import prices street (0.4%)
UK consumer prices 1.2% vs street 1.1% vs previous 0.9%
UK core CPI 1.4% vs street 1.3%
UK retail prices 2.2% vs street 2.1%
UK producer input prices 12.9% vs street 13.5%
UK producer output prices 2.3% vs street 2.5%
UK house prices 6.9% vs street 7.3%
Germany ZEW current situation 63.5 vs street 59.0
Germany ZEW expectations 13.8 vs street 14.0
Germany consumer prices 0.8% as expected
Upcoming significant economic announcements include:
(Note: 11:30 am in Sydney/Melbourne is currently 1:30 pm in Auckland, 4:30 pm in Vancouver, 7:30 pm in Toronto/Montréal, 12:30 am in London and 8:30 am in Singapore)
10:30 am AEDT Australia consumer confidence previous 101.3
10:50 am AEDT Japan Tankan large mfg Index street 10 vs previous 6
3:30 pm AEDT Japan industrial production previous (1.3%)
9:30 am GMT UK jobless claims change street 6K vs previous 9K
9:30 am GMT UK average weekly earnings street 2.3%
9:30 am GMT UK unemployment rate street 4.8%
9:30 am GMT UK employment change street 50K
10:00 am GMT Eurozone industrial production street 0.8% vs previous 1.2%
8:30 am EST US retail sales street 0.3% vs previous 0.8%
8:30 am EST US retail ex auto street 0.4% vs previous 0.8%
8:30 am EST US producer prices street 0.9%
8:30 am EST US core PPI street 1.3%
8:30 am EST Canada Teranet house prices previous 11.8%
9:15 am EST US industrial production street (0.3%)
10:30 am EST US DOE crude oil inventories street (1.5 mmbbls)
10:30 am EST US DOE gasoline inventories street 2.0 mmbbls
2:00 pm EST US FOMC decision 0.25% increase to 0.75% expected
2:00 pm EST US FOMC statement and member projections
2:30 pm EST FOMC Yellen press conference
10:30 am NZDT Thu NZ Business PMI previous 55.2
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