Federal Reserve gives lesson in managing expectations
Mario Draghi, president of the European Central Bank, could do worse than review how the head of the US Federal Reserve Janet Yellen dealt with the first rise in US rates in quite some time. The jury is still out as to whether or not the Fed has done the right thing at the right time, and there will be no conclusion to that debate until well into the future. But the manner in which Yellen managed expectations and took uncertainty out of the system prior to the announcement was exemplary. As we have said many times, investors do not like uncertainty.
What was also impressive was the way that the chair of the Federal Reserve managed to get complete consensus from other members of the board and communicated their decision in such a calm, rational and thorough way. The minutes of the Fed meeting are due to be issued in the first week of January and they will be pored over by analysts for any clues on the future trajectory and speed of further changes.
Initially there was something of a rally in the markets, but investors quickly turned their attention to other matters, and towards the end of last week volatility picked up yet again. Even some of the initial strengthening of the dollar waned, as concerns on global growth prospects re-emerged. Indeed the S&P 500 fell by 1.8% on Friday, although to put this in context, this was only giving back earlier gains so that the index finished the week with a fall of just 0.3%.
There was a similar pattern in Europe, with the Euro Stoxx 600 index losing 1% on Friday, although for the week the index recorded a gain of 1.5%. In predicting the outlook for markets, one of the wildcards is oil and the collapse in the price has been the biggest macro shock over the last year and a half. At $36.20 a barrel, Brent Crude hit its lowest level in seven years.
While a lower oil price in isolation should be positive for US and Euro consumers, and thus for global growth, the equity markets remain unconvinced. Although good for consumers, the oil price is heavily influenced by anticipated manufacturing and industrial output, as key constituents for global growth.
There was some Christmas cheer for UK retailers, as official data revealed that retail sales for November were 1.7% ahead of October's figures. Not that you would have thought that things were improving. The retailers' marketing and PR people were hard at work with their Black Fridays, Cyber Mondays and Panic Saturdays. Maybe they missed a Stressed Sunday.