In a late-night session, the U.S. House of Representatives passed a $1.1 trillion spending bill that will now go to the Senate for approval. The bill, which keeps federal government agencies funded through September of next year, was of particular interest for investors for reasons going beyond a partisan impasse. Language included in the legislation will ease key restrictions on derivatives trading by banks required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 despite fierce opposition from key Democratic lawmakers. In the Senate, Democratic leaders including Senator Elizabeth Warren of Massachusetts are expected to fight the inclusion of the provisions in the final draft. Under the new language, large banks will be able to book swaps contracts directly within federally guaranteed entities, rather than using uninsured subsidiaries as prescribed by the rules enacted in the wake of the credit crisis. The debate over the inclusion is likely to see Wall Street’s influence in federal government policy return to the spotlight in political media coverage.
Data out of China show mixed picture. Figures from China’s National Bureau of Statistics for industrial production in November were released today with a headline output index level below consensus forecasts at 7.2 percent above the same month in 2013. Retail sales for the month modestly beat expectations, while urban fixed investments moderated slightly. With data in aggregate continuing to indicate a slowdown in overall activity in the country, recent liquidity injections by the People’s Bank of China (PBOC) spurred an uptick in new private sector lending last month according to figures compiled by the bank, raising hopes that gross domestic targets for the year may still be met by way of a modest rebound in December.
Abe leads in Japanese polls. Polls show Japanese Prime Minister Shinzo Abe’s Liberal Democratic Party squarely in the lead in the run-up to the country’s special parliamentary elections this Sunday. October industrial production in Japan rose by a higher margin than anticipated by economists at a seasonally adjusted rate of 0.4 percent above the prior month.
Industrial output slows in Europe. Euro zone industrial output figures for October released today by Eurostat registered below consensus forecasts at 0.1 percent for the month and 0.7 percent year-over-year. The accompanying report for the 18-nation region indicated contractions in France, Spain and Italy for the period with dropping energy production levels as a primary driver of the decline.
Oil demand forecast slashed. An International Energy Agency report released today revised estimates for 2015 global oil demand to more than 200,000 barrels per day lower than estimates published in November. The Paris–based agency also anticipates increased production in non-OPEC nations that will continue to place pressure on prices in the coming quarters. West Texas Intermediate crude future contracts dropped below $60 per barrel in trading this morning, helping to drive the Russian ruble to a record level of 57 per U.S. dollar despite the Central Bank of Russia’s rate increase this week.
U.S. data releases today to lend insight into holiday shopping season. October producer price index levels are to be released this morning, with consensus forecasts for a marginal contraction in the headline index and a modest rise in core inflation. Separately, initial University of Michigan consumer sentiment data for December is expected to indicate an improved mood among shoppers.
Portfolio Perspective: Chinese Policymakers Okay With Disrupting Markets to Support Economy — Mary Catherine Sinclair, Strategas Research Partners
Late last month, Chinese policymakers lowered the one-year benchmark deposit and lending rates, weakening the yuan and starting Chinese equities on a move meaningfully higher, up roughly 20 percent since November 21. And this week, policymakers took a step further, announcing that bonds rated below AAA would no longer be accepted by the China Securities Depository & Clearing Corp. as collateral for local government short-term loans. China’s yuan and equities fell precipitously on the news. Only the most recent step aimed at reducing risky debt in the market and reining in China’s shadow banking system, the new local government regulation suggests that no sector is safe from the pain of fiscal reforms. Last year, banks were subjected to the liquidity crunch. Now, their profits are being squeezed through lower interest rates. Market participants betting on the continued strength of the yuan got burned earlier this year by the PBOC-incited weakening of the yuan and local governments are now being forced to find more legitimate sources of funding, such as the emerging municipal bond market. Inflation slowed to 1.4 percent year-over-year in November (1.3 percent excluding food and energy), leaving room — and the need for — more monetary stimulus. Policymakers are walking a tight rope, trying to manage an economy that, while still enjoying overall expansion, still needs some help.
Mary Catherine Sinclair is a director of economic research at Strategas Research Partners in New York.
