The market is pricing around 80% probability of a hike

Market Movers

• Today is the day when we and markets expect the Fed to start lift-off delivering the first rate hike in nine years, see FOMC preview, we expect a dovish hike, 14 December. The Fed has been challenged over the past week by the lower oil price, another sell-off in equity markets and not least significant stress in the US high yield market. We believe the hike is signalled so clearly that it is too late for the Fed to refrain but we expect a very dovish one, as the ‘dots’ outlining the FOMC members’ forecast for the Fed funds rate are likely to show a subdued path of only three hikes in 2016. Fed chairman Janet Yellen is also likely to strike a cautious tone at the press conference adding to the dovish feeling. There may also be dissenters among the FOMC members.

• The market is pricing around 80% probability of a hike and slightly less than two hikes next year. However, it most likely reflects a probability that the Fed will be forced to stop early versus a scenario where it continues to hike 3-4 times.

• Before the Fed decision, we have Euro Flash PMI this morning with France and Germany releasing first before the Euro PMI is out at 10:00 CET. We expect a marginal increase in line with recent stabilisation of the key economic indicators. In general, we expect the European recovery to gather speed next year and we see the latest improvements as the start of this. Furthermore, it should be noted that the economic indicators have been quite resistant to the weakness in the Chinese economy. Final Euro CPI for December is released at 11:00 CET.

Selected Market News

Risk appetite improved a bit yesterday going into the FOMC meeting with equities climbing higher during the afternoon and US high yield spreads also narrowing slightly after strong spread widening in the previous trading days. Some stabilisation in the oil price has helped risk assets to recover from technically stretched low levels. Asian stock markets are also higher this morning.

The oil price has stabilised around USD38 per barrel on talks of an OPEC emergency meeting as the oil price got very close to the lows from the financial crisis in 2008. It is still too early though, to conclude that we have seen the bottom. If the price declines beyond the 2008 lows at USD36.2 per barrel it could trigger negative risk sentiment again.

In China the CNY has stabilised on signs of intervention in the onshore market yesterday and indications of intervention in the offshore market (CNH) this morning as the CNH-CNY spread has narrowed from 0.08 yesterday to now below 0.06. It might help ease fears of a big devaluation triggered on Friday when China introduced a CNYcurrency basket used to evaluate the overall strength of the CNY.

Japanese Flash PMI manufacturing for December was broadly flat edging down to 52.5 from 52.6 in November. It is still a fairly robust level (average past three years is 51.6), which suggests that the past months’ improvement in industrial production was intact through the end of 2015.

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