U.S. stocks are slightly softer after softer PPI and jobless claims data suggest some weakness is creeping into the U.S. economy, shrugging off yesterday’s Fed meeting that signalled rates are on hold for the foreseeable future. Fed chair Jerome Powell’s presser had a dovish tone and the U.S. dollar could remain vulnerable if we start to see any momentum come out of Europe. The Fed will remain accommodative as the balance sheet will continue to grow as the Fed remains committed to their liquidity operations that have been keeping short-term rates stable.
Weekly U.S. jobless claims shot up 49,000 to 252,000, the biggest rise since September 2017. This is the first sign of weakness with the labor market, but one poor reading will not change anyone’s outlook. The final November PPI readings also were sharply revised lower.
The focus shifts back to trade and a key meeting between President Donald Trump and his top trade advisers. Markets are heavily pricing in a punt on with Dec. 15 tariff threat deadline, but they want some certainty that we will see a phase-one trade deal.
ECB
The ECB monetary policy decision went as expected with no change in rates, also sticking to the strategy to keep buying bonds until just before rates are hiked. She saved the announcement of a strategy review for her presser.
Christine Lagarde made her ECB debut and came off slightly hawkish. The euro rose after she announced there are some signs of economic stabilization and that risks are somewhat less pronounced. The ECB forecasts showed euro-area inflation forecasts were slightly upgraded for 2020 and 2021. The euro pared some of its earlier gains after the announcement of the strategic review.
Lagarde seems poised to help take the eurozone out of negative rates, with her first move possibly changing her risk assessment in the near future. She refrained from playing hardball in targeting specific governments need to deliver fiscal stimulus. The heavily anticipated strategic review was announced to kick-off in January and to last throughout 2020.
Turkey
The Turkish Central Bank (CBRT) delivered another larger than expected cut, bringing rate cuts for the second half of the year to 1200 bps, and that is against expectations of 1000 bps of total consensus estimates. Turkey’s one-week repo rate now stands at 12.00%, which is half of where it was back in June.
After initially weakening, the lira maintained most of its earlier gains to both the euro and U.S. dollar. Markets have come to expect deeper cuts as the new CBRT governor Murat Uysal continues to unwind the hikes in 2018 that were fighting inflation and a currency crisis.
Oil
Oil prices initially rose after EIA monthly oil report both confirmed their expectations for global demand to accelerate in 2020 and cut their 2020 forecast for non-OPEC supply by 200k barrels to 2.1 million barrels per day. U.S. production is not expected to continue its recent pace of rising production.
The report was overall mixed as the EIA also reminded energy traders that the fresh round OPEC + production cuts will not be able to avoid a 700,000-barrel surplus in Q1.
Other notable oil news included Norway’s Petroleum Directorate (NPD) average November production surged to 1.711 million barrels per day, over 13% higher than their forecast. Norway’s oil lobby also raised their investment forecast for 2020. Oil prices will start to feel the impact of stronger production from Norway in 2020 and that will likely help overcome any declines in production we may see from the US.
Gold
Gold prices rose after weak PPI data and rising U.S. jobless claims suggested some weakness is coming into the U.S. economy. Gold also saw support from ECB’s Lagarde’s debut as she highlighted the direction of inflation is good, but not at the objective. Gold will get support from the central banks as it got a dovish tone from Powell, and Lagarde wants to be hawkish, but she can’t just yet.