The start of a new calendar year does not necessarily mean the rise of new market drivers. In fact, the key issues investors face at the start of 2016 are the same that dominated Q4 2015.
These issues center around pace of Fed tightening, the outlook for the world’s second largest economy and its markets, the impact from the drop in oil prices, and commodity prices more generally, Europe will deal with the centrifugal forces that threatening it, and whether Japanese economy can find better traction.
Here is a thumbnail sketch of the drivers of the investments to help you find your sea legs after the holidays:
US
Some soft data has the Atlanta Fed GDPNow tracker indicating that growth may be slowing to 1.3% before Christmas compared with 1.9% in the middle of December. The market does not appear convinced that the Fed will hike rates again in March.
The implied yield on the March Fed funds futures contract is 43 bp. Fed funds effective average in December was 20 bp through December (not the nearly 25 bp Bloomberg WIRP page had assumed) and has not averaged the middle of the 25-50 bp range even once since the rate hike.
A favorable monthly jobs report on January 8 would encourage participants to take more seriously the prospect of a hike at the mid-March FOMC meeting. Although monthly nonfarm payrolls growth may slow over the course of the year, the pace may be sufficient for additional declines in unemployment measures. The consensus anticipates 200k net new jobs in December. If true it would be the third consecutive increases of 200k or more after soft reports in August and September.
Investors will be particularly sensitive to wage growth as the Federal Reserve is appears to be putting much stock in the idea that a tighter labor market will push wages up, and this will lift core inflation over time. The year-over-year pace of average hourly earnings may accelerate to 2.8% in December from 2.3% in November. This is largely a function of the base effect. The January comparison is more difficult, and the year-over-year pace should revert to the mean. That said, some 14 states and several cities hiked the minimum wage as of January 1.
The combination of the knock-on effects of the energy sector hit, the dollar’s appreciation, and weak world demand, the US manufacturing sector has nearly stalled. The December manufacturing ISM is likely to be below the 50 boom/bust level for the second consecutive month. The service sector appears considerably stronger. The Bloomberg consensus expects it to tick up to 56 from 55.9 in November. If it does, the Q4 average (~57) will not be as high as Q3 (~58.7), but it will be higher than the H1 average of 56.6.
Lastly, we note that December appears to have been the fourth consecutive month that US vehicle sales reached an 18 mln unit annualized pace. Cheap financing, 2.3 mln new jobs created through November, and the low gasoline prices facilitated what appears to have been a record sales year.
China
The Chinese economy appears to be stabilizing, but keeping the onshore (CNY) and offshore (CNH) in line is proving difficult. The official manufacturing PMI edged up to 49.7 from 49.6 in November, while the service PMI rose to 54.4 from 53.8. Although the comparison is fraught with problems, similarity between the US and Chinese readings is striking. The Caixin measures are at lower levels, but are expected show an expanding service sector and a third consecutive improvement in the manufacturing sector.
