The Final Countdown

Daily Analysis - 14/12/2015

Federal Reserve Prepares to Hike Interest Rates


US statistics for consumer price inflation set to be announced on Tuesday alongside recently released positive retail numbers from Friday are what the Federal Reserve needs as a leverage to push a rate hike in the upcoming meeting. Sentiment has shifted towards an 80% probability of a rate increase according to the latest Fed Funds futures rates, indicating the potential for the first hike since 2006.

German Inflation

According to the latest German inflation data released on Friday, both the CPI and HCIP matched expectations, remaining unchanged in November with both figures printing at 0.10% on a monthly basis. The energy sectors showed price appreciation with motor fuel rising by 0.70% and heating oil up by 0.30%. The greatest upside pressure was attributed to the food and fruit category which experienced a rise of 1.60%. Germany's annualized measure of consumer price inflation printed at 0.40% in November, mirroring similar growth in October. Continued weakness in oil prices together with weak domestic and external demand will likely keep inflation muted over the near-term, especially in light of no major changes to monetary policy.  Despite the deposit rate cut, until the ECB prepares to increase monthly asset purchases or other stimulus to boost the Euro Area economy, domestic demand may stay below trend for the foreseeable future.


Russian Rates Remain Unchanged

In its latest decision on monetary policy, the Central Bank of Russia left interest rates on hold at 11.00%, keeping the benchmark unchanged since the end of July. Policymakers indicated that the decision was made with the awareness of the risks to the outlook including inflation which currently stands at 15.00% annualized rate as the economy continues to cool and contract. The key sources of inflation risks remains largely external thanks to sanctions.  Aside from these factors, monetary policy normalization by the Federal Reserve combined with the continued slowdown in Chinese growth and the standoff with both Turkey and West weigh on the outlook. Russia’s economy is expected to contract -3.80% this year according to forecasts from the IMF and the pace is forecast to slow in 2016 as the economy overcomes the developments.  Nevertheless, the Ruble has hit new multi-month lows against the dollar, reaching the lowest levels since August. 


FOMC Poised to Hike

With no real major downside in recent economic data aside from the weakness in initial jobless claims  the way is paved for Federal Reserve action in the upcoming meeting. Core retail sales numbers released Friday rose to 0.40% in November, beating estimates of 0.30% and prior month’s revised value of 0.20%. Headline retail sales also edged higher to 0.20%, less than the 0.30% forecast, following October’s 0.10% gain. Consumer spending moved at a moderate pace, despite the “savings” from cheaper oil and the boost in payrolls, marking the biggest gain in four months. In another positive sign for the Federal Reserve, the producer price index climbed by 0.30% month over month despite remaining in contractionary territory on an annualized basis at -1.10%.  As the cost of services increased, dollar strength and continued declines in oil prices amid a glut and slowing global growth have dampened upward price pressures.


China Factory Output Rises

Following a substantial slowdown over the previous few months, China’s industrial production managed to rebound modestly according to the latest numbers from the National Bureau of Statistics. Expansion was reportedly at a five-month high of 6.20% in November, beating both estimates and the prior number of 5.60%. The gains are attributed in large part to the loosening of monetary policy conditions as the People’s Bank of China works to help the economy reach the growth target of 7.00% for 2015. Economists are confident that expansionary policies implemented by the PBOC are gaining in traction, but nevertheless suggest further accommodation to support languishing growth. China still continues to battle weak demand and overcapacity in key sectors of the economy that will weigh on the outlook. With the Federal Reserve preparing to raise rates, the risk of intensifying capital outflows has added to China’s policy challenges.


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