FED’S KAPLAN: FOUR RATE HIKES ARE “NOT BAKED IN THE CAKE”

 Fed’s Kaplan: four rate hikes are “not baked in the cake” Dallas Fed President Rober Kaplan said that four rate hikes in 2016 are “not baked in the cake”. Fed officials overall expect four rate hikes this year, according to the median of their forecasts from December. The global stock market volatility and concerns about slowing growth in China have forced the Fed to hold of raising rates before. As such this could happen again if the stock market turmoil continues and China’s slowdown don’t stabilize anytime soon. Nevertheless, the Fed official said that it was too soon to tell if the situation over China will get worse or if in few months the nation will rebound. Investors are now focused on when the next rate hike will be, with end of January being too soon as the Fed will not get enough economic data since their last meeting to justify a rate rise. Between now and March however, there might be sufficient data to warrant a rate hike. As we have noted several times, USD remains data driven, and strong data are needed to keep the greenback on a rising mode.

• Crude oil prices tumbled more than 5% on Monday Crude oil prices plunged yesterday to trade just above USD 30 pb. A world-wide glut of crude oil and worries about emerging-market demand have kept the price of oil down, and market participants now expect the price of oil to break below USD 30 and test the USD 20 zone. China’s slowdown along with the fact that drillers won’t quit pumping despite the oil glut are likely to keep oil under selling pressure, in our view.

• Today’s highlights: During the European day, the main event will be the UK industrial production for November. Expectations are for the industrial output to have remained flat after rising 0.1% mom in October. The construction and manufacturing PMIs for the same month were not particularly encouraging. Neither was the Q4 Economic Survey by the British Chamber of Commerce, which described most manufacturing sector key balances as being weaker in Q4 than in Q3. For these reasons, we see an increased likelihood for a soft industrial production figure as well. This could weaken GBP at the release.

• From the US, we get only secondary importance data. The NFIB small Business Optimism Index for December is coming out. Even though this indicator is not a major market mover, it is worth watching it due to the Fed’s emphasis on employment, as small businesses employ the majority of people in the US. Additionally, the Job Opening and Labor Turnover Survey (JOLTS) report for November is due to be released. This survey will also report the “quit rate”, which measures workers who voluntarily resign, and is a closely watched indicator of how strong the job market is. Following the better-than-expected NFP figure for December, these indicators could add to evidence that the US jobs market is on a solid ground.

• We have several speakers on Tuesday’s agenda: Fed Vice-Chair Stanley Fischer, and Richmond Fed President Jeffrey Lacker speak. ECB Executive Board member Villeroy de Galhau, ECB Executive Board member Peter Praet, ECB Executive Board member Jens Weidman and ECB Executive Board member Sabine Lautenschlaeger speak. Bank of Japan Governor Haruhiko Kuroda and Bank of England Governor Mark Carney also speak.