By Övünç Kutlu
U.S. letter, week beginning Dec. 5

What happened last week?

The most important development last week was the strong data that showed strengthening in the American economy.

Non-farm payrolls increased by 178,000 in November, according to the Department of Commerce last Friday. The data, which is closely watched by the Federal Reserve for the wellbeing of the American economy and its rate rise decision, was expected by the market to increase by 180,000.

Nevertheless, on a three-month basis, the average non-farm payrolls remained unchanged at 176,000.

The unemployment rate fell 0.3 percent basis points to 4.6 percent in November – the lowest level in the last nine and a half years – to beat the market expectation of 4.9 percent. This means that this rate fell to a level that has not been seen since before the 2008 global financial crisis.

The other major development in the U.S. economy last week was the strong GDP data. The American economy grew by 3.2 percent in the third quarter of this year, marking its strongest monthly increase since the same period of 2014.

After growing by 1.1 percent and 1.4 percent in the first and second quarters of the year, respectively, many analysts view that the strong GDP growth in the third quarter means the recession risk in the economy has become much lower, and the Fed is more likely to increase its benchmark interest rate on Dec. 14.

Other macroeconomic data that has raised the possibility of a rate hike by the Fed was the rise in personal spending and personal income.

Personal spending increased by 0.3 percent in October, and its September figure was revised from 0.5 percent up to 0.7 percent -- the second highest monthly increase in the last two years.

Personal income rose by 0.6 percent in October, beating the market expectation of 0.4 percent, and marking its strongest monthly gain in the last six months. Its September figure was also revised from 0.3 percent to 0.4 percent.

Increases in personal spending and personal income suggest that the inflation figure is now closer to reach the Fed’s target of 2 percent, analysts noted.

The private sector added 216,000 new jobs to the economy in November -- its highest monthly increase since December 2015 – and beating the market expectation of 170,000.

Global credit rating agency Standard & Poor’s (S&P) said Friday that it estimates the U.S. economy will grow by 1.6 percent this year, 2.4 percent next year, and 2.3 percent in 2018. S&P also noted that it expects the unemployment rate to be 4.6 percent at the end of 2017, and wages to increase 3.6 percent and consumer spending to rise 2.5 percent year-over-year.

On the global oil market, the most important development last week was OPEC’s decision to cut its production by 1.2 million barrels per day (mpd). The cartel finally agreed to limit its output to rid the glut of supply in the global market, which caused prices to drop since mid-2014. This was also the organization’s first intervention into the global oil market in the last eight years.

As a result, oil prices gained 12 percent last week. International Brent crude price climbed over $50 a barrel to reach its highest level in over a year.

Although Saudi Arabia agreed to carry most of the burden within the cartel by lowering its output by 486,000 bpd, experts concur that this is not expected to negatively impact the Saudi economy, as long as the increase in prices compensates for the cut in the Kingdom’s production.

The U.S.’ output, on the other hand, is anticipated to increase in the second half of next year, as oil prices above $50 a barrel are expected to provide a lifeline for American shale producers.

Increasing oil output from the U.S., in return, could bring back oversupply worries in the global oil market and push prices lower again, analysts warned.


What to expect this week?

It will be a calm week in terms of macroeconomic data. Investors and the markets will, however, continue to watch data and follow the Federal Open Market Committee (FOMC) members’ statement to assess their views of the U.S. economy and try to determine whether the Fed will make a rate hike decision on Dec. 14.

New York Fed President William Dudley said Monday that the latest macroeconomic data indicate a strong American economy and if it grows at a sustainable higher pace, the rate hike could come quicker than previously anticipated.

“The economy is in reasonably good shape … Assuming the economy stays on this trajectory, I would favor making monetary policy somewhat less accommodative over time by gradually pushing up the level of short-term interest rates,” he said during his speech in New York.

On Tuesday, non-farm productivity for the third quarter and trade balance in October will be announced.

Weekly change in the U.S. crude oil and gasoline inventories will be revealed Wednesday. If the inventories increase higher than market expectations, a short-term decline in oil prices could be seen.

On Thursday, weekly initial jobless claims will be announced, and the University of Michigan consumer sentiment will be revealed on Friday.

If the macroeconomic data is revealed stronger than expectations, the Fed’s likelihood of increasing its benchmark interest rate would get higher. 

06 Dec,2016