Actions across the globe in the next two months could shape a distinctly divided global economy heading into 2017.
US Housing
Data showed a conflicted US housing market. Existing home sales expanded 170K, while housing starts shrunk by 103K[1]. This is not shocking as housing starts reflect future closings, 4- 6 months down the road and existing home sales show closings occurring now. Given the closing timeline on new starts in the dead of winter the off-set is understandable.
The US:
Data released during the week was mixed, but supported the idea of a rate hike in December. The impact of a Federal Open Market Committee (FOMC) rate hike in December cannot be understated. That is, unless you are New York Fed President William Dudley, who was quoted as saying a rate hike “is not really that big of a deal”[2]. Clearly his statement is one of many where the FOMC is preparing markets for a rate hike in December. The error in his statement is the interplay a rate hike has on the global economy.
A rate hike in the US would signal strength in the US economy and push the $ higher. Also, it would make inflation more subdued as import costs would soften. It would also limit US multi-national company’s ability to compete on price and reduce profitability in goods sold abroad.
The EU:
This week the European Central Bank met and left rates unchanged. More of a focal point was the ECB President’s statements, or lack thereof, regarding a tapering of their current bond buying program. Many believe that the ECB intends to extend their bond buying program another 6 to 9 months past March, 2017.
This action would be a sign of weakness in the European economy and would cause the € to fall. This would increase inflationary pressures. This would also make their multi-national corporations more competitive and profitable on exports.
Oil and Commodity Based Economies:
Oil prices are denominated in $. An increase in the value of the $ spells a fall in oil prices just to maintain par value internationally. Lower oil prices hurt many of the commodity based economies that rely on oil revenues for economic well-being.
There is an OPEC meeting at the end of next month that will be watched closely to see if production freezes from OPEC can lift oil prices before a potential set back.
Conclusion
The impact of the ECB bond buying extension at the same time as an FOMC rate hike could spell a decline in oil prices globally. If that occurs, we could likely see emerging market economies that are heavily commodity based struggle. Inflation and corporate earnings in the EU will pick up. While the US would see inflation and corporate earnings moderate.
Should this play out we could see stronger performance out of developed non-US countries and a stronger dollar. In all, this would be a base case scenario, so it is a likely outcome… unless of course it does not happen…
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[1] www.investing.com – economic calendar
[2] www.troweprice.com – global weekly wrap up