Waiting on Fed

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Market Drivers December 14, 2016
Tankan up for first time in 18 months
UK labor data mixed
Nikkei 0.02% Dax -0.20%
Oil $52/bbl
Gold $1163/oz.

Europe and Asia:
JPY Tankan
GBP UK Jobless claims 2.4 vs. 5.5
GBP UK Average Weekly Earnings 2.5% vs. 2.3%
EUR IP 0.6% vs. 0.8%

North America:
USD US Retail Sales 8:30
USD US PPI 8:30
USD FOMC 14:00

It’s been a typically listless pre-FOMC night of trade with majors tracing out narrow meandering ranges throughout Asian and European trade as markets prepare for the marquee event of the month.

In Asia the Tankan report of Large Manufacturers Index came in at 10 versus 6 prior – that was the best reading in 18 months and a clear sign that lower yen is having a very positive impact on demand in Japan. USDJPY saw little reaction to the news as it does to most Japanese data as it continued to trade either side of 115.00 for most of the night.

In UK the Labor data came in mixed with three month over three month unemployment showing a loss of -6K versus 50K expected. That was the first negative reading in a year, but its was offset by strong wage growth as Average Weekly earnings rose 2.5% versus 2.3% eyed. Cable sold off on the news briefly dropping below the 1.2650 level but then stabilized in quiet London late morning trade.

In US before the FOMC the market will get a look at PPI as well as US Retail Sales data. The market is looking for PPI to essentially stay steady at 1.3% but for Retail Sales to ease to 0.4% from 0.8% the month prior. The Redbook data indicates a bit stronger demand so perhaps the data will surprise to the upside. Consumer demand has clearly picked up this year with 6 out of the past 7 months showing positive gains in Retail Sales and the trend is likely to continue today.

Once the data is digested by the market the focus will shift to FOMC and the initial reaction will likely to pivot off the dot plot. If the dot plot shows no changes with FOMC members expecting two hikes next year, the dollar is likely to drop in a knee jerk fashion as traders will see this as signal that the Fed will remain cautious for the foreseeable future.

Later in the presser, the market will get a much fuller picture of Fed’s growth expectations and perhaps a clearer indication from Ms. Yellen on the path that it will take. We remain convinced that the Fed will continue to be non-committal and “data-dependent” in its outlook, especially because the much vaunted wage push inflation has yet to materialize. On the other hand if Ms. Yellen sounds optimistic about the outlook for 2017 and dismissive about the recent decline in wage growth, the dollar will surge and likely take out 117.00 figure in the euphoria that follows.

Boris Schlossberg
Managing Director

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