Danske Research Team
Danske Bank A/S
Market Movers
In the US, focus is on CPI inflation. While PCE core inflation (the Fed’s target measure) is subdued significantly below the 2% target, CPI core inflation was 2.0% y/y in November. We estimate that CPI core inflation increased to 2.1% y/y in December.
In the UK, the labour market report for November 2015 is due. Wage growth as measured by the annual growth rate in average weekly earnings excluding bonuses (3M average) has been weak in the recent reports and the coming report should not be any different. We estimate wage growth declined from 2.0% in October to 1.8% in November. We expect the unemployment rate (3M average) to be unchanged at 5.2%.
The Bank of Canada’s (BoC) rate decision might also attract some attention today. Following the latest oil price rout, markets are now pricing in more than a 50/50 chance of the BoC rate cut. We acknowledge that it is a close call, but we think the BoC will keep rates unchanged today as the weakening of the CAD should do a lot of the rebalancing work. One possibility is that the BoC could re-introduce a form of forward guidance as governor Poloz's predecessor, Carney, pursued with some success in order to anchor rate expectations.
Selected Market News
US equity markets failed to sustain the rebound seen in the European session yesterday, and Asian markets are back in the red this morning as uncertainty about Chinese and global growth outlook and the continued fall in the oil price knocks down investors’ risk appetite.
This morning, markets in Hong Kong are taking the lead and the Hong Kong dollar (HKD) fell to the weakest level since the Lehmann collapse in 2007 at 7.82 versus USD while 12M USD/HKD FX forwards trade at 7.8850and thus above the upper bar of the range at 7.85 guaranteed by the Hong Kong Monetary Authority (HKMA) under the existing exchange rate system. The sell-off in HKD is mainly driven by the weak sentiment toward Chinese assets, which remain a source of capital outflows and probably also some speculation that the fixed exchange regime versus USD will not last.
The International Monetary Fund (IMF) yesterday cut its world growth outlook from 3.6% to 3.4 % in 2016 and from 3.8% to 3.6% in 2017. Overall, the IMF sees global growth risks tilted to the downside with a sharper-than-expected slowdown in China or further appreciation of the dollar and tighter global financing conditions as the main sources of risk.
On a similar less positive note, the International Energy Agency (IEA) yesterday in its monthly Oil Market Report, concluded that warm winter and weaker growth in emerging market economies, in particular in China, are the main factors behind the recent overproduction and the slide in the oil price. Moreover, Chinese oil demand declined in Q4 and demand growth is set to slow further in 2016, according to the IEA, suggesting that the oil price is likely to remain under pressure as long as uncertainty regarding the outlook for global growth is high.
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