The FOMC minutes certainly showed that rates are going to be locked in at the current rate for at least the next four months; even with expected rate rises towards the back-end of the year, money will remain cheap in 2015 on a historical basis. This will mean liquidity support for markets will remain this year.
Looking ahead to the coming weeks, several major events and data releases are due that will set up Q1 and beyond:
- Non-farm payrolls tonight are predicted to show that even with the interruption of the Christmas holiday period, the US added 240,000 new jobs. This will support the FOMC minutes’ economic outlook that consumer sentiment is rising solidly.
- US earning season starts on Monday and Alcoa’s release will be watched as bottom-up support of the economic assumptions from the Fed. The likes of AMEX, MasterCard and Visa will be particularly interesting, considering the final quarter of the year will see a spike in consumer spending and whether or not the economic forecasts are translating into actuals.
- The US earning session will also illustrate the effect of USD strength and whether this has had a detrimental effect. With approximately 53% of corporate America revenues coming from oversea, the rapid appreciation against is major trading partners, particularly the EUR and JPY, has fundamental analysts concerned that earnings are likely to be impacted. If there is lower corporate growth due to the currency differential, the effects of monetary policy over the past five years may unwind and non-farms may fall back below the target level of 200,000 jobs a month.
- The Greek elections could be the deal breaker for the EUR and the common currency union. The outcomes from the election are clouded and the fallout from a negative result is worrisome at the very least. The zone is also weeks away from the expected announcement of European-styled QE. The question that needs to be asked here is – what if Mario Draghi doesn’t act to buy sovereign bonds and just continues his rhetoric? Will his ‘whatever it takes’ mantra come crashing down around him as the market loses confidence?
- China data over the coming two weeks will set up how the PBoC and the central government will react to support growth in the world’s second largest economy. Today sees December CPI data which has remained well below the official estimate of 3.5% year-on-year, and may see China pulling different monetary levers to alleviate this issue on the back of another sub-par read.
- China is also a few weeks away from releasing its fourth-quarter GDP figures. Estimates are forecasting year-on-year growth of 7.2%. This may be a little weak for comfort and I see the acceleration of the 300 infrastructure projects announced a few weeks ago, worth CNY7 trillion, as a sign the central government is looking to shore up the GDP forecast. I also see further changes to lending facilities and credit flow, despite the fact 2014 saw largest level of excess credit flowing into the country.
Ahead of the Australian open
We are calling the ASX up 41 points to 5422 as energy stocks surge in the US. This should see a snap-back in the energy sector here after four days of savaged selling. November retail sales are also due for release today and despite the lead in the month to Christmas expectations are for sales growth to moderate to 0.2% month-on-month from 0.4% in October. Listed retail stocks have struggled over the previous four months and were hoping for a boost from the Christmas period.