Did the unexpected again occur Friday? Commenting first about OPEC, OPEC did not decrease production but rather increased the production target to 31.5 million barrels from 30 million barrels a day.
Wow! However OPEC only revised its formal target to the level it has been producing for the past 18 months, a production level that will be hard press to increase given capacity restraints of all of its members and the lack of reinvestment back into oil infrastructure. Oil settled lower about a $1 barrel, closing around mid-week levels.
Was the OPEC decision a surprise or did it only reflect reality? Is OPEC only making a point to ensure the continuation of massive project cancellations outside of OPEC? Probably.
And then there is the jobs data. The 211,000 gain in November’s non-farm payrolls, along with the 35,000 upward revision to the gain in the preceding two months, would appear to seal an interest rate hike next week. The hiring was broad based.
The unemployment rate remained unchanged at 5.0%, but only because the labor force rebounded by 273,000, slightly outpacing the 244,000 increase in household employment. As a result, the labor participation rate rose to 62.5% from 62.4%.
Average hourly earnings rose 0.2%, matching the consensus view. Perhaps more importantly last month’s strong gains were not revised lower. If December’s wages rise by 0.2%, year over year wage gains would now be 2.8%, the greatest increase since June 2009.
As indicated, the data all but cemented the first interest rate hike next week in nine years. Equities surged on the data, reversing last week’s decline, a decline predicated by fears of higher interest rates.
What??? As commented many times, the markets are entirely dominated by HFTs, trading based upon momentum and moving average lines.
I reiterate an interest rate increase is a sign of strength not weakness, the proverbial all clear sign.
What will happen this week? The economic calendar is comprised of various inflation indices, retail sales, sentiment surveys. The bulk of the data is released at week’s end.
Last night the foreign markets were up. London was up 0.47%, Paris u-p 1.84% and Frankfurt up 2.18%. China was up 0.34%, Japan up 0.99% and Hang Sang down 0.15%
The Dow should open flat following the most volatile week since the summer. The 10-year is unchanged at 2.27%.
DID THE UNEXPECTED OCCUR?
Ken Engelke
Chief Economic Strategist Managing Director
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