Article / 17 December 2015 at 14:00 GMT

Steen’s Chronicle: The big nothing?

Chief Economist & CIO / Saxo Bank
Denmark
  • USD is set to weaken because of the hike
  • Don't underestimate China as RMB 'goes global'
  • What's best for 2016? EM, of course
  • El Nino will actually be a force for good

Janet n' Oscar
 One of these is a genius. Montage: Wikimedia Commons

I love to talk about nothing. It's the only thing I know anything about – Janet Yellen….sorry, Oscar Wilde!

Finally! Saxo Bank’s Outrageous Predictions 2016  is out, and less importantly – the Fed hiked!

My "real" 2016 outlook in headlines will be this:

  • US Dollar will weaken – it will follow the “normal path”, which is a weaker USD after the first hike. 

  • China will do better than expected – the easier monetary policy, but more importantly, the “internationalisation of RMB” will drive demand up, not down.

  • Emerging markets will be the best performing asset – being cheap, it has both price and value. Argentina is moving towards a floating currency and this is the first good news in three years: There's more to come.

  • 2016 will be a year of two halves: A bad start, and a good finish. S&P will trade both 1.800 and 2.200 during the year, but overall 2016 will be a “year of transition from zero-bound, no working policies towards a new business cycle which will start with a “bust” and then a new start.


  • Inflation will be higher next year – higher than expectations: El Nino adds 0.2%, base effect another 0.2% and then some demand pull and more credit flow.

Federal Reserve – Fed says four, market says maximum two – I’m with the Fed

The Fed left it  late, probably too late, but the tone of the press conference and “dots” indicates the central bank's strong belief in its forecasts. Four hikes are on the cards for 2016, the market consensus is two hikes offered – the gap remains and for now the risky assets trades on fading the Fed. However, the Fed does tend to deliver any promised hikes. An excellent piece “Historical lesson from Federal Reserve rate-hike cycles” from Allianz Global Advisors proves the point:

Allianz
 




























Source: Allianz Global Advisors


Healthier growth

Q4 GDP looks better and better, my favorite indicator: Fed Atlanta’s GDPnow is now well inside the consensus:

GDPNow
 

The big question: Inflation or not?


The main “new information” I got from chairwoman Yellen was her increased confidence in inflation picking up – here lies a potential “explanation” between the Fed and the market. The market simply does not buy higher inflation despite these recent headlines:

core inflation
 
Euro core inflation at two-year high and overall core inflation has not only increased but stayed close to 2% at all times. Here is the link to Yellen's direct answer to a question about inflation.

Meanwhile, my main theme for Q3 and Q4 of this year – the price of capital rising continues – I don’t need to remind you but it has been carnage.


Tactical

I leave 2015 risk-wise very light on positions – my price signals are not flashing yet and the only thing I will want to own is upside in crude (WTI), gold/silver and weaker USD.
 
It will take the market a week at least to get the message that the cost of money has now started a move higher and probably much higher than most people can even imagine. Some 80% of all traders in the market today have never lived through a Fed hike cycle and the cost of capital needs to rise – the 57 trillion USD of debt which has financed the weaker growth we have seen since 2009 now needs to be addressed.

Thank you

Let me use this opportunity to say thank you to all the customers, investors, conference attendees, media and colleagues I have met in my busiest year ever.

I have been on the road for more than 120 days, been to more than 30 countries, but everywhere I am astonished how smart, open and engaged everyone is and this despite me often telling you that you are the dumbest generation ever, the most bland, the most average, and the least productive!

This ability to accept the discussion, for us to have the conversation has been the highlight for me and it’s a sign of not only a willingness but also a commitment to move towards a mandate for change.

I wish all of you a happy holiday, may the presents be large and plenty,

Safe travels,

Steen “Santa Claus” Jakobsen


– Edited by Clare MacCarthy

 

Steen Jakobsen is chief economist and CIO at Saxo Bank

1y
ChartFollower ChartFollower
Steen, I watched you on CNBC before the Fed Decision and you said if the Fed Hike the USD
will sell-off and were very Confident of this!
1y
Steen Jakobsen Steen Jakobsen
Very confident is strong - What I AM saying is... given that EACH time in the past four rate cycles the US dollar has weakened - then I respect that - furthermore, as an economist, its clear to me that a STRONGER US dollar = global recession.
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