Morning Report: 17 December 2015

17th December 2015 By: Ranko Berich

GBP With so much anticipation surrounding the US interest rate decision last night, sterling remained largely out of the market’s limelight. Nonetheless, there were some important takeaways in official labour market data, which was released in the morning. The Unemployment Rate fell to 5.2%, close to most estimates of ‘full employment’; that is, the total number of those who are actually both willing and able to work in an economy. However, the nature of that employment may leave something to be desired, as the Bank of England has recently pointed out, as inexperienced and young workers may be holding down the average rate of wage increases. The Average Earnings Index did indeed see its annual growth fall to 2.4%, down from 3.0% previously. This is clearly not enough for the Bank of England to even think about raising rates, and therefore yesterday’s releases can be broadly taken as sterling negative. This morning’s Retail Sales figures have shown the UK consumer could not care less about the fact real wages are below 2008 levels, however, as retail Sales rose a whopping 1.7% month on month in November.

EUR There was actually a good whack of relevant euro data released yesterday, but it was also largely lost in the noise leading up to the US rate announcement. Purchasing Managers Indices from France, Germany and the eurozone were released, which are surveys gauging the strength of activity in the Manufacturing and Services Sectors. The readings remained fairly robust, despite the European Central Bank not delivering on the extra monetary easing that was expected at this month’s meeting. Moreover, with Eurozone Core Inflation remaining stable at 0.2% year on year, and headline inflation actually exceeding expectations with a move up to 0.2%, the overall impression from the data was positive for the eurozone.

USD So, at long last the big day arrived, and for the first time since 2006 the US Federal Reserve did indeed decide to raise interest rates last night. The hike to 0.5% had been heavily signposted by the Fed over recent months, meaning that the initial reaction was fairly muted, with the dollar only strengthening slightly. This effect was considered a historic success for the Fed Chairwoman Janet Yellen, as the move was digested by the markets without causing any undue volatility. However, the subsequent release of the individual Fed’s committee members interest rate hike forecasts showed that, in light of the continued weakness in energy prices and other deflationary pressures, overall the Fed now believes the speed of interest rate hikes over the coming years will be slower. Once the market had seen this, the initial dollar strength reversed, with the greenback losing almost a point against the euro. Despite this, the subsequent Press Conference with Fed Chair Yellen was far more bullish than the market had anticipated. Yellen has historically been seen as one of the more reserved members of the voting committee, but it became apparent yesterday that overall, the Fed remain very confident about the state of the US economy. Furthermore, they still believe the prospects for inflation returning to target in the medium term are high. In fact, a very comfortable majority expected interest rates to be around 1.25% or above at the end of 2016, implying another 3-4 similar rate hikes in the near future. Yellen was quick to say that these hikes would not follow a mechanical schedule, but would instead be contingent on economic data hitting the Fed’s internal projections. Nonetheless, markets still reacted positively to the perceived bullish tone, and the dollar strengthened to finish the day up against almost all of its major counterparts. Today at 13:30 GMT the Philly Fed Manufacturing Index will be released alongside weekly Unemployment Claims and the United States Current Account.

CAD The loonie continued to weaken yesterday, hitting yet another multi-year low against USD. Crude oil prices continued to deteriorate, and the rate hike from the US Federal Reserve further widened interest rate differentials between the US and Canada. On top of all of this, the supply glut in North American Crude once again worsened, with North American inventories rising 4.8 million barrels last week.

UK news

  • Reuters. UK retail sales leap as shoppers boost pre-Xmas spending: British retail sales jumped in November as shoppers bought more than expected ahead of Christmas, pointing to strong consumer demand boosting the economy as a whole into the end of 2015.
  • Reuters. British pay growth slows, pushing back interest rate hike bets again: Workers’ pay in Britain grew at a slower than expected pace in the three months to October, suggesting the Bank of England will take even longer to raise interest rates from the record low in place for nearly seven years.
  • Guardian. Brexit will set UK back £11bn in EU trade costs, research finds: Businesses and consumers will pay heavy price if UK forced to trade by WTO rules and not free trade agreement, says Lord Rose
  • Daily Mail. House prices ‘will soar 50% to an average £420k within 10 years’: Buyers will need £100k deposit and £70k salary to buy a home, estate agents forecast: House prices will rise 50 per cent to an average of more than £400,000 within the next 10 years, according to a new forecast.