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BOV Market Watch - Week Ending 16th December 2016
16 Dec 2016

Fed raises rates ahead of Trump presidency. As expected, the U.S. Federal Open Market Committee (FOMC) raised the target Fed Funds rate by a quarter of a percentage point to 0.5%-0.75%. This increase represents the sole rate increase for 2016, following the December 2015 move, and the second increase since 2006. What surprised markets was that the FOMC implied three rather than two rate hikes of 0.25% each in 2017. However, in her press conference, Chairperson Janet Yellen emphasised that this represented a modest change that was driven by improving employment data, as indicated by a lower unemployment rate, higher realized and expected inflation, and as Yellen conceded, the consideration by certain FOMC members of potential changes in fiscal policy under a Trump administration.

Eurozone industrial output falls for second consecutive month. Eurozone industrial output declined in October for the second month in a row disappointing economists who predicted a slight rise. Industrial output slid 0.1% month-on-month, much slower than the 0.9% decline seen in September but in contrast to a 0.1% rise economists had expected. The decline was mainly due to lower production of intermediate and non-durable consumer goods heralding muted growth in the fourth quarter. The figures meant the end of a seven-month pattern in which decreases in one month were followed by increases the following month and vice versa. On a yearly basis, industrial production growth more than halved to 0.6% from 1.3%. Output was forecast to grow by 0.8%.

German investor confidence measure signals strong year-end for the economy. German economic sentiment held steady in December, signalling that Europe’s largest economy is on track to end the year on a strong note. The ZEW Indicator of Economic Sentiment, which aims to predict economic developments six months in advance, came in at 13.8 points, unchanged from November, survey results from the Centre for European Economic Research (ZEW) showed this week. Economists had expected a modest improvement in the measure to 14. However, the reading was below its long-term average of 24.0 points. The data follows recent indications that Germany is gathering steam after a slowdown in the third quarter.

UK unemployment falls again. The number of persons who are unemployed in the U.K. fell by 16,000 to 1.62 million in the three months to October, according to the Office for National Statistics (ONS). During the same period, the unemployment rate held steady at 4.8%, down from 5.2% a year ago but unchanged from the three months to September. The employment rate came in at 74.4%, slightly down from the joint record high of 74.5% recorded in 2016. Average weekly earnings excluding bonuses rose by 2.6% in the year to October. This is slightly higher than the previous month. The U.K. has one of the lowest unemployment rates in the European Union.

Paolo Gentiloni to succeed Matteo Renzi as Italian prime minister. Italian Foreign Minister Paolo Gentiloni has been chosen as the country's next premier, but his role won't be official until he chooses a cabinet and secures a vote of confidence in parliament. The biggest and most immediate crisis facing Mr Gentiloni is a financial one. Late last week, the European Central Bank rejected a request by Monte dei Paschi for more time to arrange a capital infusion from private investors.

Greece passes austerity 2017 budget. As mandated by the country's creditors, Greece's parliament has passed a 2017 budget of continued austerity. Prime Minister Alexis Tsipras says it will mark Greece's "final exit" from its nearly decade-long financial crisis. After a small recession this year, the budget foresees the economy expanding by 2.7% in 2017, but more austerity and tight credit conditions mean the forecast could be too optimistic.

OPEC, non-OPEC agree first global oil pact since 2001. The focus this week was on the oil market as the non-OPEC / OPEC meeting over the weekend resulted in an agreement by non-Opec members to cut production for the first time since 2001. Non-OPEC nations have pledged to cut production by 558k barrels per day (bbl/day) and Saudi Arabia signalled that it is ready to cut production further compared to the announced cuts at the 30 November Vienna meeting. Following the announcement, oil prices rallied strongly. The higher oil prices have pushed inflation expectations higher with the 10-year U.S. Treasury selling off with yield above 2.5% for first time since September 2014.

India's inflation eases in November. India's wholesale prices cooled in November following the demonetisation of the 500 rupee and 1,000 rupee notes from November 8. Data from the Ministry of Commerce & Industry showed this week that wholesale prices climbed 3.15% year-on-year in November, slower than the 3.39% increase seen in October. The expected rate was 3.1%. Separately, official data showed that inflation, based on the consumer price index, eased to 3.63% in November from 4.2% a month ago.
Venezuela pulled its largest bill, the 100-bolivar, from circulation this week, as the country introduces new higher-value notes. Venezuelans will then have 10 days to exchange the currency at the central bank in a move that will likely worsen the country's cash crunch. The bolivar, worth just $0.02 on the black market, has fallen 55% against the dollar in the last month.

Venezuela pulled its largest bill, the 100-bolivar, from circulation this week, as the country introduces new higher-value notes. Venezuelans will then have 10 days to exchange the currency at the central bank in a move that will likely worsen the country's cash crunch. The bolivar, worth just $0.02 on the black market, has fallen 55% against the dollar in the last month.

 

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