Strong Data Against Fed’s Softness

World markets were under pressure at the start of the week, due to concerns around world growth. In our view, there are more reasons to worry that the positive US statistics will not allow the Fed to soften its policy as markets expect.

The November’s Retail Sales, published on Friday, were marked by 0.2% increase (versus the forecast – 0.1%). At the same time, the October’s data were revised from 0.8% to 1.1%. Industrial production jumped to 0.6% in November. Consumer activity displays growth as well: Lending gaining momentum and Consumer sentiment are near record highs now.

In addition, the United States Federal Reserve Chair Powell noted the strength of the national economy in his last speech. It may also be regarded as a signal to the markets not to expect any softening of the Fed's tone.

Earlier, FOMC has predicted to raise the rates thrice next year, but the markets, for some reason, put in the quotes one increase only. Moreover, at certain moments, chances of this step were even less than 50%.

According to PMI estimates, in contrast to strong US statistics, Friday data from Europe showed a slowdown to 4-year lows. Earlier, China reported about a sharp decrease in both, retail sales and production.

The strength of the American economy is supporting the dollar demand now and put pressure on the stock indices. On Friday, the USD updated the 19-month highs to a 6-largest-world-currencies basket, developing its growth trend.

EUR/USD is now trading near 1.13, an important support level of the recent months. Falling under this mark may be the beginning of a new pair decline. Over the past three years, such failures have ended with falls to 1.05.

S&P 500 closed last week at the lowest levels of the year. If the Fed’s attitude turns out to be tougher than the markets’ expectation, stock indices decline and a dollar rise will have an impulse to the further extension.