The Global Markets Weekly – 11/27/15

Posted November 30, 2015 by rvillareal

Will Godot Come Before Santa?[private]

The near-term economic indicators remain mixed and suggest that GDP growth will have a hard time advancing much more than 2% this quarter.  Since the Fed has set such a low bar regarding the data being “good enough” to start hiking interest rates next month, investors know it would take a sub 125K jobs report and/or a crashing stock market to stop them.  Nine of twelve district banks requested a discount rate hike last month, up from six in August, a sure sign that the FOMC is closer to doing the dirty deed.

There is some risk from US fiscal policy however.  The continuing resolution controlling appropriated government. spending (about 30% of the total) expires on December 7.  Newly installed Speaker Ryan has indicated he will use the next extension as a lever to confront the White House about policy.  The next extension already includes a higher capital limit on the stress tests for banks, with the $50B limit lifted to $500B.  This would mean that a firm like Capital One would be exempt from stress tests if the law is passed.  A compromise to $100B as proposed by Fed Governor Tarullo, which may be in the range of a potential compromise.

We can only hope that the Republicans do not challenge Obama on more controversial issues like Planned Parenthood.  If so the Federal government might be shut over Christmas.  While would inconvenience those interested in visiting a national park or renewing their passports, shutdowns usually have little major effects, since they have never lasted more than a few weeks.  A debt default would be much worse but can’t happen until 2017.

• U.S.:  Investor are resigned to a Fed rate hike next month, making this busy week less important unless the ISM report (Tu) or jobs (Fri) sag very badly.  A ton of Fed speakers hit the tape but we wish they would be speaking after the jobs report.
• Eurozone: The ECB Council meeting on Thursday has, of course, taken on a clearer profile given the increased downside price risks that the central bank highlighted last time around (ie mid-October). However, there may very well be clear dissent within the Council given the better data seen of late, a trend that Tuesday’s HICP update may continue! Such dissent may not prevent the ECB majority from providing more stimulus, but it may temper what is actually agreed upon as the Council tries to limit damage to its credibility. Some tinkering with official rates is likely, involving a cut of around 10 bp, but any enlargement/extension of its asset purchase program may be modest, possibly merely removing the September deadline, if that!
• UK: It will be interesting to see if the refreshed strength in the housing market and signs of strength in consumer lending start to influence BoE thinking more clearly. Indeed, this may be the main theme in the BoE Financial Stability Review (Tue) which may formally call for more controls on bank lending to the housing sector, particularly for buy-to-let!
• Japan: The key data this week, especially on industrial production (Mon) will confirm a visible pickup is unfolding in Q3 after the surprising drop in Q2.
• Other central banks:  In Canada, the BoC are not expected to change policy (Wed), after two rate cuts earlier this year.  Inflation comments will be closely watched as the pickup in prices has yet to appear.  In Australia, since the unexpected cut in May, another stable decision is expected this time around (Mon).

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