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Week in Review: Markets Take Prospective Fed Rate Hike in Stride

For the week ended 20 November 2015

  • Fed minutes point to December hike
  • US housing data mixed
  • Japan enters recession
  • Eurozone prices up 0.1%
  • Flurry of mergers announced in 2015

Global financial markets rose, unaffected by last Friday’s terrorist attack in Paris. Investors were comfortable with growing signs of a US Federal Reserve interest rate hike in December. Japan had a second straight quarter of contraction, while the European Central Bank is leaning towards expanding its stimulus program in December in response to deflationary risks.

Overall, equity markets advanced strongly and the Chicago Board Options Exchange Volatility Index (VIX) fell below 16 from 20 last week. The yield on US 10-year Treasuries fell below 2.24%. The price of crude oil hovered near $40 and $44 per barrel for US West Texas Intermediate and Brent, respectively. The price of an ounce of gold fell to a five and a half year low of $1,065 before rebounding slightly.

US and global economic news

Fed minutes focus on December rate hike
US Federal Reserve officials focused on a possible December interest rate hike at their October policy meeting, according to minutes released Wednesday. Financial markets were unusually supportive of a likely December rate hike, rallying Wednesday and sustaining the advance late in the week.

US prices up slightly
The US Consumer Price Index rose a seasonally adjusted 0.2% in October. Core prices, excluding food and energy, also gained 0.2%. Core prices were up 1.9% from a year ago. Real average hourly earnings climbed 0.2% in October and were up 2.4% from October 2014.

US housing starts down, permits rise
US new-home construction declined by 11% in October to an annual rate of 1.06 million. However, permits for new construction, a leading indicator, rose 4.1% to a 1.15 million annual rate. Permits for single-family homes increased 2.4% to their highest level since 2007. Homebuilder confidence fell slightly in November after reaching a 10-year high in October.

US industrial production drops 0.2%
US industrial production fell a seasonally adjusted 0.2% in October, according to the Fed, and capacity utilization fell slightly. Most of the weakness was confined to utilities and mining. Factory output increased for the first time in three months, with a 0.4% advance.

Weekly US jobless claims fall to 271,000
Initial jobless claims declined by 5,000 to 271,000 for the week ended 14 November. The four-week moving average rose 3,000 to 270,750. Continuing claims fell 2,000 to 2.18 million for the week ended 7 November.

Japan’s economy shrinks 0.8%
Japan’s gross domestic product shrank at an annualized rate of 0.8% in the third quarter, the second straight quarter of diminished economic activity, a technical recession. Economists had forecast a 0.2%–0.3% contraction. The recession is Japan’s fifth since the financial crisis of 2008. Japan has had six quarters of growth and five quarters of contraction since Prime Minister Shinzo Abe took office in December 2012.

Eurozone inflation up slightly; more stimulus expected
The eurozone consumer price index rose 0.1% in October year over year, while the core CPI, excluding food and energy prices, rose 1.0%. The European Central Bank’s October meeting minutes pointed to a likely expansion of the bank’s stimulus program in December. ECB President Mario Draghi said this week that the bank will do what it must “to raise inflation as quickly as possible.”

German produce prices slide
Germany’s producer-price index contracted 0.4% in October, and prices fell 2.3% from a year ago, the largest decline in five years.

German investor confidence rises
The ZEW German investor confidence gauge rose to 10.4 in November, improving significantly from a 1.9 reading in October and well above a consensus forecast of 5.5.

US and global corporate news

M&As top $4 trillion
Announced corporate takeover deals have crossed the $4 trillion mark for 2015, second only to the amount for 2007. A record 128 deals worth more than $5 billion have been announced.

Nokia to buy Alcatel-Lucent for $16.6 billion
Finnish wireless-equipment firm Nokia is offering to buy Alcatel-Lucent for €15.6 billion ($16.6 billion). The purchase would diversify Nokia’s wireless network products to include network routers and switchers.

Marriott to buy Starwood for $12.2 billion
Hotel giant Marriott plans to buy Starwood Hotels & Resorts for $12.2 billion, creating the world’s largest hotel company. Starwood had been in merger talks with Hyatt Hotels. Shares of Hyatt rose after the deal was announced, while the stock of both Marriott and Starwood fell.

Air Liquide to buy Airgas for $10.3 billion
France’s Air Liquide agreed to buy US-based Airgas for $10.3 billion. The two firms have complementary businesses. Airgas produces gas cylinders used in health care, food production and manufacturing while Air Liquide makes gases, including hydrogen used for car-charging stations. Both companies’ boards of directors unanimously voted for the deal, which is subject to approval by regulators and by Airgas’s shareholders.

Square IPO bounces back
Mobile payments firm Square recovered from a scaled-back IPO price and a lower-than-anticipated valuation of $2.9 billion as shares rose 64% in the stock’s debut Thursday. After opening at $9 per share, well below the expected $11–$13 range, shares rose to $14.80 on day one.

The week ahead

  • Markit releases the Eurozone flash composite purchasing managers' index on Monday 23 November.
  • Japan releases its flash manufacturing PMI on Monday, 23 November.
  • US GDP is set for revision on Tuesday, 24 November.
  • US durable goods orders are reported on Wednesday, 25 November.
  • Japan reports its consumer price index on Thursday, 26 November.

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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times;;;

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