Opec, US Fed and ECB meetings this month mean choppy waters ahead

An improving data docket over the course of November has given the Fed a decent foundation to justify an interest rate increase.

The Fed has closely monitored the US jobs picture and uses it as the main tool in forming future Fed policy. David Paul Morris / Bloomberg

Filled with event risk, this month promises to bring with it heightened levels of volatility.

Expectations of a US rate increase have reached their climax, with more than 74 per cent of the market expecting the Federal Reserve to end its decade-long policy of close to zero interest rates when its members convene on December 15 and 16.

An improving data docket over the course of November has given the Fed a decent foundation to justify an increase. Starting with the jobs picture in the United States – October’s payroll figures came in at 271,000 new jobs, shattering the highest expectations on the street, which was for 185,000 new jobs. Perhaps more important than the headline jobs number was the improvement in average hourly earnings, which increased to 2.5 per cent from 2.3 per cent annualised.

The overall unemployment rate fell to 5 per cent from a previous reading of 5.1 per cent – and this amid a 62.4 per cent labour force participation rate that has held near 38-year lows over the past two months.

The Fed has closely monitored the US jobs picture and uses it as the main tool in forming future policy – and this effect reflects in the sentiment of the broader markets. Going into November’s report, traders priced in a 58 per cent chance of a rate rise in December – and after the report, expectations spiked to 74 per cent following the better-than-expected figures.

Markets can expect more clarity with the release of December’s report due out on Friday – and realistically, we would need to see in excess of 200,000 new jobs created during November, with the overall unemployment rate holding at 5 per cent, to justify any form of action this month.

While it is impossible to gauge the decision of the Fed come mid-December, elevated expectations of a rate increase have been driving the US dollar higher. The US Dollar Index, a measure of the greenback against a basket of currencies, is trading at multi-year highs and breaching the psychological level of 100.

The recent pricing action hints that the chances of an increase are already priced into the markets – and following the confirmation of the lift-off, markets could expect a regression in the dollar. However, in the lead-up to the Fed announcement at the conclusion of their meetings on December 16, we can expect heightened levels of volatility, with the dollar reacting sensitively to the economic data docket.

Across the pond, hints of additional quantitative easing measures coupled with a rampant dollar have resulted in the euro slipping to seven-month lows against the greenback. Conditions in the euro zone have shown few signs of improving, and during last month’s meetings, European Central Bank (ECB) president Mario Draghi hinted that the bank could ramp up its monthly asset purchases.

The ECB next convenes on Thursday and has a host of tools to combat the stagnant inflation effects underpinning the euro recovery, including increasing the overall asset purchase programme which currently sits at €1 trillion, along with the possibility of slashing rates further into negative territory.

With much of this priced into the performance of the euro over the course of the past few weeks, the euro’s worth against the dollar should make a strong test of that 2015 low of 1.0460.

And finally, energy markets continue to remain anaemic amid a strong dollar. The West Texas Crude Intermediary contract is treading water near six-year lows. Earlier in November, crude was boosted by comments from the Saudi Arabian oil minister, Ali Al Naimi, when he called for more investments in the oil industry in a bid to stabilise the energy markets.

With Opec convening on Friday, it is unlikely that the group will announce any cuts in output, but instead discuss other measures to facilitate the stabilisation of the energy markets. Crude will remain volatile through December with strong support coming at $38 per barrel.

Gaurav Kashyap is the head of futures at AxiTrader ME DMCC