A robust jobs report for November and upward revisions on the previous two months reinforced expectations that the Fed will raise interest rates at their mid-December meeting. Speculators have increased the odds of a rate hike to 79 percent in the futures market. If they are correct, this will be the last full week of the zero-interest rate policy since 2008. Though the market has prepared by pricing in the hike and investors have responded favorably, the potential exists for some volatility should data points over the next ten days catch speculators, traders and/or investors off-guard.
The November retail sales report due out on Friday will provide an indication of consumer sentiment and holiday spending. October’s wholesale inventories report, another important consumer barometer with significant influence on the GDP calculation, will be released on Wednesday and could shift the Atlanta Fed’s GDP Now estimate, which is currently forecasting growth of 1.5 percent this quarter.
Earnings season draws to a close this week with top companies scheduled to report, including Adobe Systems (ADBE), AutoZone (AZO), Costco (COST), H&R Block (HRB) and luxury homebuilder Toll Brothers (TOL). Better than expected earnings and retail sales data will continue the upward momentum enjoyed by the market for nine of the past ten weeks. Home builders have rallied slightly over the past month to a near 52-week high which could be further fueled by a strong report. TOL comprises more than 7 percent of iShares US Home Construction (ITB).
In contrast to solid U.S. economic and equities data, commodities continue to suffer. Traders’ delayed reaction to OPEC’s decision on Friday to leave oil production unchanged led to selling on Monday. West Texas Intermediate Crude broke the $40 price level in early trading, falling to $38 and change. A test of the 2015 lows now appears likely, while Brent crude, the price for European oil, is already at a new low.
Governors are not expected to change interest rates at the upcoming Bank of England meeting. Overseas news will instead focus on China’s economic data. The world’s second largest economy’s recent struggles have resulted in falling commodity prices. China’s foreign exchange reserves fell at their fastest pace since August last month, leading investors to dump the freely traded offshore yuan. Chinese trade data, along with inflation and industrial production reports due early this week, is expected to indicate a continuation of the downward trend in economic activity. Global demand for China’s industrial commodities will be an important factor for new lows.
A weak yuan is also troubling for commodity producers and emerging markets. U.S. equities, however, should be bolstered by low commodity prices and a strong dollar, which attracts foreign investment, as well as by the traditionally optimistic holiday season.