Weekly Market Review 04-10/01/2016

Market Outlook for 2016

Since we’ve got a brand new year in front of us, now would be a great time to look at what 2016 could have in store. We know that, with little exception, the global economies all revolve around the major central banks. Of course, we’re talking primarily about the US Federal Reserve, the Bank of England and the European Central Bank. So without further ado, let’s take a look at what might be ahead for both the currency and stock markets.

Will US Rates Continue to Rise in 2016?

Late in December 2015, the Federal Reserve Bank hiked the Fed Funds rate by 25 basis points. That was the first time in nearly a decade that US interest rates had moved in an upward direction. Making “good” on her promise, the rate increase also helped save Chairman Janet Yellen’s reputation. Now, markets are asking how many more rate hikes will be forthcoming and what’s the timing?

From the Fed’s “dot plot” we can presume four more rate increases are possible this year. However, markets aren’t quite so certain, if interest rate swaps are any indication. It all depends, of course, on how inflation plays out in 2016. The Fed sees inflation heating up which could justify the Fed’s prediction. That would mean that that Dollar’s bullish trend could very well continue into 2016.

Two pieces of key data could help investors gauge the next possible rate hike. The first clue will be the upcoming release of the Fed’s latest meeting minutes. From that, investors will learn which FOMC members were in favor of raising rates and which were not. The arguments, for and against, will also be well detailed. Those arguments could be used to assess the likely future leaning of the voting members.

The second clue will be the first 2016 release of US labor data, aka Non-Farms Payrolls. After December’s robust figures, investors are hopeful for a repeat performance which would provide support for the US Dollar.

Can Stock Markets Continue to Surge Higher?

The recent Fed rate hike may have taken the wind out of the sails for some equity investors. But is that cause for worry? Markets are betting on two more rate hikes in 2016, but only two. Essentially, stock market investors want the Fed to be wrong in its inflation outlook and rate projections. But even beyond that, is that a cause for worry? Around the globe, it’s doubtful that liquidity will be an issue. That is especially true given that the ECB, Bank of Japan and People’s Bank of China are all bent on loosening the proverbial purse strings.

Will the BoE follow the Fed’s Lead and Raise Rates in 2016?

The BoE has, in the past, been in lockstep with the Fed. But this time, the BoE’s position is far less clear cut. Various indicators seem to point to a UK economy that is finally getting a toe-hold on growth.

The problem is that that economic growth creates quite a dilemma. Economic growth helps the Pound Sterling to appreciate. Unfortunately, that makes UK-produced goods too expensive for its biggest trading partner, the European Union. EU consumers, as a result, import less and less from the UK. And then the UK’s economic growth begins to deteriorate. By definition, that is the classic Catch-22 situation. That makes the BoE’s next move far less certain.

Will Super Mario, Finally, Do the Right Thing?

Over the past many, many months, the European Central Bank has continued to maintain an ultra loose monetary policy. Last month, Mario Draghi, the president of the ECB, surprised markets just a bit. In the past, Super Mario had repeatedly pointed out the need for more stimulus. Even so, he hasn’t exactly opened up the doors to the ECB vaults.

For now, the feeling is that Draghi is waiting to see how the Fed’s rate increase will impact the Euro and Eurozone inflation. If a stronger dollar helps, then it’s all well and good. However, if that impact is less than expected, Draghi will once again need to haul out the ECB’s big guns. It is a near certainty that, eventually, Draghi will be compelled to do the right thing. The hope is that it will be sooner rather than later.

Down to Business

In 2016 it will all boil down to one thing. And that is, can the other economies “catch up” to the US? If they can and do, that will put a stop to the Dollar’s enduring rally. If they can’t and don’t you can expect that last year’s trend is likely to continue well into 2016.

On the Plate

Eurozone Inflation(Tuesday) – If the Eurozone core CPI figure will beat estimates and jump above 1% YoY it will favor the Euro, any other result could pressure the Euro lower once more.

FOMC Minutes(Wednesday) – After the historic rate hike by the Fed in December it will be interesting to see the actual protocol of the FOMC meeting and figure out where the winds are blowing when it comes to the second rate hike. If the protocol will reveal the second rate hike is closer than the census believes the Dollar could gain further.

Nonfarm Payrolls & Unemployment(Friday) – Undoubtedly a dramatic open for 2016. If Nonfarm payrolls beats estimates and unemployment falls further it will increase dollar appetite even further.

Chart of the week:

Weekly chart gold 04/01

Economic Calendar:

Real Time Economic Calendar provided by Investing.com.