U.S.: Fed begins new era
As expected the Fed raised short term interest rates by +0.25% to a range of +0.25% to +0.5%. It was the first increase in over nine years and the first time rates have been greater than 0% in seven years. The Federal Open Market Committee’s decision was unanimous. All 17 participants foresee more rate increases in 2016 to an average rate of 1.4%, implying four hikes of 0.25% each, although we expect a slightly slower pace. The statement was mostly dovish, twice mentioning “gradual” increases, softness in exports, and a “shortfall of inflation.” In addition inflation forecasts for 2016 were marked down -0.1% to +1.6%, well short of the +2% target. As changes in monetary policy can take a year or more to fully affect the economy, and since rates will remain historically low through 2016, and the Fed has no immediate plans to shrink its balance sheet, monetary policy is still extraordinarily loose.
In other news, November housing starts and permits were strong gaining +10.5% and +11.0% (m/m, respectively). Manufacturing industrial production was flat resulting in an anaemic +0.9% y/y rate. And congressional leaders are on the verge of a budget deal which would include eliminating the 40-year-old ban on exporting oil.
Turkey: Q3 GDP surprises but risks for 2016 are rising
Q3 GDP increased by +4% y/y, after +3.8% in Q2 and +2.5% in Q1, driven by surging (pre-election) public spending (+7.8% y/y), inventory re-stocking (+0.4pps) and improving net exports. The latter added +0.1pps to Q3 growth (-1pps in Q2) as the fall in imports (-1% y/y) outpaced that for exports (-0.6%). Turkey is a large energy importer benefitting from low global oil prices. Consumer spending growth slowed to +3.4% y/y in Q3, reflecting the TRY depreciation and rising unemployment (10.1% in Q3). Investment contracted by -0.5% y/y after a strong Q2 (+9.7%). Early Q4 data suggest growing momentum of economic activity. EH lifted its full-year GDP growth forecast to +3.6% for 2015 (previously +3.2%). However, the forecast for 2016 was lowered to +3.3% (from +3.6%) as downside risks for next year have increased. The recent sharp deterioration in relations with Russia is likely to have adverse effects on Turkish exports and Russian investment in Turkey, thereby leading to renewed currency instability. Also, a weaker TRY could trigger inflationary pressures and rising interest rates.
Eurozone: Solid but slowing year-end business confidence
Eurozone Composite PMI contracted marginally to 54 in December, dragged down by Services. On the contrary, the Manufacturing sector output rose at the fastest pace in 20 months. The other bright spot is the positive employment outlook supported by consistent growth in private sector new business and high backlogs of work. Germany experienced solid - though weaker - output growth in December, shown by the Composite PMI decline from 55.2 to 54.9. Slowing output growth in services and overall weaker growth in new business were offset by manufacturing good performance on the back of improved external demand - new orders were on the rise for the 5th consecutive month. France is showing more mixed results as service PMI decreased from 51 to 50. However, new business in private sector rose for the 4th consecutive month. Overall, the Q4 PMI confirms growth is likely to rise by a meager +0.3% q/q as the quarterly average edged down compared to Q3.
South Africa: Three finance ministers in one week
Market turmoil – the ZAR fell to record lows against most leading currencies, including the USD, and there was a sell-off of government bonds – when President Jacob Zuma replaced FM Nhlanhla Nene was to be expected, as was the bounce back when Zuma rescinded his initial appointment and re-introduced Pravin Gordhan as head of the treasury. However, investors and markets in general will be concerned by the apparent failure to gauge the impact of the first change on financial markets. Governance as a whole is under increasing scrutiny. It is too early to suggest that Zuma’s hold on power is irretrievably jeopardised but the ANC will be concerned that the party’s image (and therefore electoral standing) is slipping. The main concern when Nene was replaced was a perception that it signalled the end of orthodox economic policies. Paradoxically, the latest episode and its fall-out may now ensure policy continuity in the short term. Unfortunately, this suggests upward pressure on interest rates to curb inflation and continuing weak GDP growth (capped at around +2% in 2016-17).