Mish's Global Economic Trend Analysis

Paradigm Change: Saxo Bank's Ten Outrageous Predictions for 2016: Slide Show
Fed Hikes: Range Moves to 1/4 to 1/2 Range; Fed Signals Four More Hikes in 2016
Industrial Production Declines Most in 3.5 Years, Down Eighth Time in Ten Months

Paradigm Change: Saxo Bank's Ten Outrageous Predictions for 2016: Slide Show

Posted: 16 Dec 2015 04:14 PM PST

Every year, Saxo Bank CIO and chief economist Steen Jakobsen comes up with a selection of "outrageous" predictions for the new year.

Note: This is not the official Saxo forecast, but I do believe many of the ideas below are in-line with their general direction on things.

The predictions are not all that outrageous. I expect many will happen.

Here's the email from Steen.

Close of the Paradigm by Steen Jakobsen

The irony in this year's batch of outrageous predictions is that some of them are "outrageous" merely because they run counter to overwhelming market consensus. In fact, many would not look particularly outrageous at all in more "normal" times – if there even is such a thing!

In other words, it has become outrageous to suggest that emerging markets will outperform, that the Russian rouble will be the best-performing currency of 2016, and that the credit market will collapse under the weight of yet more issuance. We have been stuck in a zero-bound, forward-guidance lowering state for so long that there exists a whole generation of traders who have never seen a rate hike from the Federal Reserve. As we close out 2015, it has been nearly 12 years (early 2004) since the US economy was seen as recovering strongly enough to warrant starting a series of hikes - and that series ended in early 2006, nearly ten years ago.

Mind you, I have been trading for over 25 years and I have only seen three Fed rate hike cycles in my entire career: 1994, 1998 and 2004.

We are truly entering a new paradigm for many market participants and the new reality is that the marginal cost of money will rise, and thus so will volatility and uncertainty.
All of this is embedded in this year's Outrageous Predictions. As always, it's rewarding to see how our customers pitch in and how this publication creates a stimulating debate. Our hope is that these predictions might both inspire you and unsettle your more complacent assumptions.

More than anything, we encourage you to join the debate – whether you agree or want to push back and argue the other side. It is this process of discussion and thinking outside the box that is at the heart of Saxo's now quite long history of outrageous predictions.

Let me again and for good order's sake remind you that this is not Saxo Bank's official forecast. It is, however, a set of ten independent events which we at the time of writing think could have a material impact on your portfolio should they come to fruition.

2015 was a poor year for us in terms of predicting the outrageous, but as I travelled around the world over the past 12 months it became obvious to me that we are at some sort of an "end of the road" in terms of world markets.

We are at the close of the paradigm that has reigned since the response to the global financial crisis. Quantitative easing and the policy response have failed us, China is transitioning, and geopolitical tensions are as complicated and hot as ever, to name just three key factors.

I hope that this year's suite of predictions will prepare you for whatever comes our way in 2016, and while we can hardly hope to be right on more than one or two predictions each year, we'd like to think that these "outrageous" calls have at the very least a greater probability of coming true than the near-constantly wrong consensus.

I wish you a happy holiday and a good trading year in 2016!

Steen Jakobsen / CIO

Outrageous Powerpoint

Here's the Saxo PowerPoint Presentation that you can download if desired.

1. Euro Rallies to 1.23

2. Rise of the Ruble

For a text explanation behind each view please see Saxo Bank Outrageous Predictions for 2016.

Mike "Mish" Shedlock

Fed Hikes: Range Moves to 1/4 to 1/2 Range; Fed Signals Four More Hikes in 2016

Posted: 16 Dec 2015 11:06 AM PST

Today, the Fed hiked by 1/4 point as widely expected and signaled. Here is a snip from the Fed's Statement

The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Fed moved its target range from 0-25 basis points to 25-50 basis points. Within that range it will be interesting to watch how the Fed actually positions increases and how fast.

Fed Signals Four More Hikes in 2016

Bloomberg reports Fed Ends Zero-Rate Era; Signals 4 Quarter-Point 2016 Increase .

The Federal Reserve raised interest rates for the first time in almost a decade in a widely telegraphed move while signaling that the pace of subsequent increases will be "gradual" and in line with previous projections.

The Federal Open Market Committee unanimously voted to set the new target range for the federal funds rate at 0.25 percent to 0.5 percent, up from zero to 0.25 percent. Policy makers separately forecast an appropriate rate of 1.375 percent at the end of 2016, the same as September, implying four quarter-point increases in the target range next year, based on the median number from 17 officials.

Will the Fed hike 4 times? I highly doubt it. We will find out soon enough.

Mike "Mish" Shedlock

Industrial Production Declines Most in 3.5 Years, Down Eighth Time in Ten Months

Posted: 16 Dec 2015 09:22 AM PST

Industrial production shocked to the downside this morning with a drop of 0.6%, the most in 3.5 years vs. an Econoday Consensus guess of -0.2%. Moreover, last month was revised lower, from -0.2% to -0.4%.

November was another weak month for the industrial economy, in part reflecting unusually warm temperatures that are driving down utility output. Industrial production came in at the Econoday low forecast, down a very sharp 0.6 percent in November. This is the biggest drop in 3-1/2 years. Utility output fell a monthly 4.3 percent after falling 2.8 percent in October. Mining, reflecting low commodity prices and contraction in energy extraction, has also been week, down 1.1 percent for a third straight decline.

This brings us to the most important component, manufacturing where October's 0.3 percent bounce higher (revised downward from 0.4 percent) now unfortunately looks like an outlier. Manufacturing production came in unchanged in November reflecting weakness in motor vehicles, down 1.0 percent in the month, and also a dip back for construction supplies which fell 0.2 percent after a weather-related surge of 2.3 percent in October. One positive is a slight snapback for business equipment which, after declines in the two prior months, rose 0.2 percent.

All the weakness is pulling down capacity utilization, to 77.0 percent in November for a heavy 5 tenths dip. Utilization is running more than 3 percentage points below its long-term average. Mining utilization is now under 80 percent, down 1.1 points in the month to 79.4 percent. Utility utilization fell 3.4 points in the month to 74.5 percent with manufacturing utilization down 1 tenth to 76.2 percent. Excess capacity, though not cited as a major factor behind the lack of inflation in the economy, does hold down the cost of goods.

Year-on-year rates confirm the weakness, down 1.2 percent overall with utilities down 7.6 percent and mining down 8.2 percent. Manufacturing is in the plus column but not by much at plus 0.9 percent. Weather factors are skewing utility output but otherwise, readings are fundamentally soft and reflect the downturn in global demand made more severe for U.S. producers by strength in the dollar.

Fundamentally Soft

For comparison purposes, let's check out what Bloomberg had to say last month vs. what I said last month.

The comparison can be found in my November 17 report Industrial Production Unexpectedly Declines Again: Don't Worry, It's the Weather and Mining.

Bloomberg on Industrial Production Nov 17

In a deceptive headline, industrial production fell 0.2 percent in October but weakness is in utilities and mining. Boosted by construction supplies, manufacturing, which is the core component in this report, rose a very solid and higher-than-expected 0.4 percent to end two prior months of decline. ... Construction supplies jumped 1.7 percent in the month in a reminder of how strong construction spending is right now. ... Utility output, reflecting the nation's unseasonably warm weather, was really down October, falling 2.5 percent. Year-on-year output is down 1.5 percent. Mining output, the report's third main component after manufacturing and utilities, fell 1.5 percent. This component, down a year-on-year 6.9 percent, has been getting hit by weak commodity prices. ... It's not been easy to find good news out of the manufacturing sector which makes this report a standout of sorts. Gains in production, however, would have to extend through year-end to turnaround what has been a weak, export-hit year for the manufacturing sector.

Mish on Industrial Production November 17

If you throw out consumer spending, utilities, mining, total utilization, downward revisions to total utilization, and pray consumer auto buying holds up, this was an excellent report.

Industrial Production Y/Y and M/M

Hidden Strengths and Weaknesses

Industrial production is down for the eighth time in ten months. There is no deceptive decline, nor hidden strength. Everything is in plain sight.

For discussion on hidden strengths and hidden weaknesses, please see ...

Mike "Mish" Shedlock

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Wednesday, December 16, 2015

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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