Current Environment - Macro Overview

  December 16, 2015

Markets responded fastidiously to comments by Federal Reserve members that the U.S. economy was strong enough to start absorbing a gradual rise in rates. Federal Reserve officials also indicated that rates would rise gradually while maintaining extreme sensitivity to employment and other vital economic indicators. The news was embraced as optimistic since a rise in rates would serve as a validation that economic growth is underway.

A concurrent tightening by the Federal Reserve, along with continued easing by the European Central Bank (ECB) in Europe, would continue to strengthen the dollar from its current levels, which has become a depressant for already weak commodity prices worldwide. A strong U.S. dollar tends to make commodities cheaper for U.S. and developed international consumers, but adversely affects emerging market countries that rely on commodity export revenue.

A divergence between U.S. rates and international rates continued throughout November as short-term rates rose in the U.S. concurrently as rates fell in other countries. As rates rise in the U.S., the dollar strengthens.

The combination of a strong dollar and rising rates is having a precarious effect on commodities. Interestingly enough, the simultaneous rise in real and nominal rates reflects the notion that inflation is still contained. Commodities are seeing additional downward pressure since inflation is not enough to warrant buying precious metals to hedge against inflation pressures. The terrorist attacks in Paris ironically had a positive effect on the domestic and international equity markets. Markets globally demonstrated a resilience to the terrorist activity as it was considered isolated and not of an impact to financial markets. The attack was a validation that isolated incidents
such as what occurred in Paris were limited to the immediate economy and for only a short period of time.

The EIA reported that gasoline prices nationwide were the lowest since 2008 heading into the Thanksgiving holiday. Continued low gasoline prices have allowed consumers
and travelers more money left over for other purchases.

 

Sources: Fed, EIA, Reuters, ECB, USDA, U.S. Dept. of Energy

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