All locked in for December

The minority group still holding on to the idea that Janet Yellen won’t increase rates in December has been reduced to the economic perma-bears and the most dovish economists over the weekend.

Source: Bloomberg

Of the 73 economists surveyed by Bloomberg last weekend, only five see a ‘no change’ at the December meeting (however, how they see this is a different question).

The November non-farm payroll (NFP) figure of 211,000 means the first mandate from the Fed is averaging 213,000 per month over the past six months and 220,000 over the past 12 months. The slack in US employment has been narrowing consistently since the mandate was introduced and Yellen’s consistent commentary that inflation is a lagging indicator should see December all priced in.

The next step is the press conference – we want to see a possible ‘outlining’ of how a ‘normalisation’ of monetary policy will transpire in 2016. Clearly ‘speed’ (or lack thereof it) is going to be the next driver of positioning – Yellen is looking for a ‘slow and steady’ mandate to normalisation but will the market allow her to do this?

This December event remains our baseline scenario.

However, trade reactions to the NFP have been anything but textbook, and other market events have seen volatility return in strength.

Things of note

As expected, OPEC left all current output measures unchanged for a third year in a row, as the Saudi pre-meeting language disappeared to see them reverting to their baseline position of keeping the policy of increasing production to squeeze out competitors. WTI is now sub US$40 a barrel at $39.97.

Gold has had an amazing week, up 2.65%. What’s even more amazing was the snap back on Friday after the NFP surging 2.25%, which was in conjunction with the USD surge. It was a complete market miss-match; the logical conclusion is short-covering of the heavily short gold paper trade. The positioning in the US bond market and USD suggest this move in Australia won’t last long.

AUD/USD remaining incredibly resilient, at a 73.86 high before USD buying flooded in to see it settle at 73.2 cents. However, the pair added 1.96% for the week. This is despite Brent falling 4.7% and iron ore falling to a new decade low of US$40.03 a tonne down 6.7% for the week. This is a serious gap in pricing.

Equities experienced volatility not seen since late September – the ASX moved through a 162 point range, and logged two days of +2% moves last week. The AUD-commodities-equities disconnect is at its highest level of the year, yet BHP’s ADR sees the cash market opening up 0.6% higher to $18.04 despite moves in oil, iron ore and coal over the weekend.

ASX direction is currently one of indirection – the index has traded through a 400-point range for the past two and half months. There is no clear direction or any real conviction in being short or long. It hasn’t closed above its 100-day moving average since June but nor has it traded outside of one-standard deviation from the 21-day moving average – keep your stops close as we expect side-ways trade to persist.   

Ahead of the Australian Open  

We are calling the ASX up 32 points to 5183, as both financials and materials look to start the week on a positive note. CBA’s ADR is up again to $80.87 with NAB is scheduled to deliver a key details of the Clydesdale spin off today. Banks should be the leading sector.  

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