December 7, 2015
Prior Week Summary
The divergence of global central banks was on full display last week as the barriers for the Fed to raise its benchmark rate for the first time in a decade begin to fall away, while Mario Draghi and the European Central Bank took measures aimed at increasing the amount of monetary accommodation in the Euro Zone. Indeed, Janet Yellen has signaled to the market over the course of the last few days that economic growth is likely to be sufficient over the next year or two to result in further improvement in the labor market. At the same time, she believes that longer term inflation expectations remain well anchored and inflation is likely to return to the 2% target as the disinflationary effects of recent declines in the commodity complex and strength of the dollar begin to normalize.
Oil extended recent losses as OPEC announced late last week that it will continue on its current path and will not rain in production as it saturates the market with supply in an attempt to squeeze out marginal producers and increase market share. Following the announcement, WTI crude fell below $40 a barrel, which could increase the amount of discretionary spending consumers deploy in the holiday season.
On the other side of the pond, Mario Draghi and the ECB cut the bank’s deposit rate to -0.3% and increased the time-frame of its bond buying program. The markets had broadly anticipated an increase in size of the quantitative easing program and were disappointed that the bank left the program at the same size, and didn’t decreases the deposit rate further. The markets were broadly short the euro vs the dollar prior to the announcement, causing the euro to rally meaningfully following the announcement (1.059 – 1.094).
The sell-off in the Dollar, relative to the Euro, combined with the strength of the jobs report will help smooth the path for the FOMC to increase rates at the December meeting. The Labor Department reported on Friday that the economy added 211,000 jobs in November, following an upwardly revised 298,000 gain in October. Interestingly, the report detailed that employment gains in November benefitted from the largest increase in construction sector hiring in over a year. As of this writing, the market’s implied probability for an increase in the policy rate at the December meeting has reached 80% as the two-year Treasury note trades near the psychologically important 1% boundary.
The Look Forward
A few top tier data releases are on tap for this week, starting with data on wholesale inventories and import prices. On Friday , the Commerce Department will provide updates on the consumer sector with the retail sales report. On Wednesday the government will auction $21b in 10-year notes, and will auction $13B in 30-year bonds on Thursday.