For the week ending December 4, 2015

The interplay of markets and central bank agendas created volatile moves in all financial assets during the week, both on the upside and downside, as market expectations were not met.

On Thursday, Mario Draghi, the president of the European Central Bank, announced more stimulus for the Eurozone but less than what the market expected. The euro rallied strongly against other major currencies in response and major market equities and fixed-income securities sold off. Although Draghi extended quantitative easing, he did not loosen as much as the market had hoped.

Friday’s announcement on US non-farm payrolls greatly encouraged the stock markets, increasing 211,000 for the month of November and revising upward September and October payrolls a total of 35,000 jobs. With these revisions October payrolls grew to 298,000 jobs while unemployment remained at a healthy 5 per cent.

The strong US dollar has had an impact on US manufacturing as well as exports. The Institute for Supply Management Purchasing Manager’s Index (PMI) fell below the 50 mark to 48.6 indicating contraction. Similarly Chicago’s PMI fell to 48.7, falling steadily in recent months from 53.5 in June.

Coincident with the decline of purchasing managers’ indices was a widening in the US trade deficit on the back of a strong US dollar and weak foreign demand. The strength of the US dollar could discourage the Fed from raising interest rates, should the lower manufacturing and exporting numbers impact employment.

The Organisation of Petroleum Exporting Countries also met during the week and decided to maintain production at 31.5 million barrels a day above the 30 million barrel a day quota, driving the dollar value of a barrel down to $40.08.

In less than two weeks the US Federal Reserve will announce whether or not it will raise interest rates. Supporting an interest rate hike is greatly improving employment numbers; however, manufacturing and exports are being negatively affected by the stronger US dollar and this could eventually hurt employment numbers on the manufacturing side. We would suspect that the Fed would like to see more easing on the part of the ECB to increase foreign demand for US goods and services.

So the market assigns a 75 per cent probability for a hike in the Fed funds rate later this month. All OECD economies are functioning well below their inflation objectives and dollar strength is starting to be a problem for the US trade numbers.

The markets are demanding a quarter-point rate hike in the US but we think the size of such a hike would be problematic for exports, inflation, and employment. We expect an eighth of a point hike should the Fed raise interest rates on December 18.

Robert Pires is the chief executive officer of Bermuda Investment Advisory Services Ltd. He can be contacted at rpires@bias.bm.