Looking Into the Crystal Ball For 2016
Monday December 14, 2015 14:10
As traders brace for the first Federal Reserve rate hike since before the Global Financial crisis began in 2008, it is time to dust off the crystal ball and gaze into the future. What lies on the horizon in 2016?
Unless the Federal Reserve falls off the horse, the federal funds rate will finally launch from seven years of zero-bound interest rate levels at the conclusion of the December 16 FOMC meeting. The current 0% to 0.25% was instituted on December 16, 2008.
Looking into 2016: The Fed is expected to hike another two or three times during 2016, leaving the federal funds rate in the 1.00 to 1.25% range by year-end 2016. There are risks to that outlook. The continuing bloodbath in the energy markets keeps downward pressure on inflation, which could hamper the Fed's ability to raise interest rates even minimally.
The growth outlook: Wells Fargo projects U.S. gross domestic product (GDP) growth at 2.4% in 2016, slightly below consensus estimates of 2.5%. That is still below trend, or more historically normally growth levels above the 3% range.
Inflation: Slightly higher headline inflation forecasts are seen in 2016, but they still stand below the Fed's 2% inflation target. Wells Fargo projects for full year 2016: 1.9 percent for headline CPI and 1.6 percent for the headline PCE deflator.
Around the globe: Wells Fargo calls for a generally stable global picture, but really more of the same. "Slow rates of growth persist abroad, but no collapse is expected in any of the major economies. In 2016, we project Chinese GDP growth to moderate to 6.3 percent; Japanese GDP growth to edge up to 1.0 percent; and Eurozone GDP growth to rise to 1.9 percent," according to Wells Fargo.
Other central banks: The post global financial crisis world of quantitative easing, near zero interest rates and historically accommodative monetary policy will remain hallmarks for other major advanced nations in 2016. "Monetary policy accommodation will remain highly accommodative around the world in 2016. Only the Bank of England appears to be even close to consideration of a rate hike," Wells Fargo says.
It all adds up to more of the same: Slow economic growth, below-target inflation, extremely accommodative monetary policy.
Gold traders can monitor: The only factors that are changing are the age of the economic cycle and the current Bull Run in equities –which are both getting long in the tooth. Markets move in cycles and recent years have seen equities outperform commodities. The current bull phase in U.S. equities began in March 2009, and the current rally is nearing its seventh birthday, which is historically stretched. Markets cycles can and do change. If the stock cycle switches, it may be the commodity sectors turn to step in, lead and turn higher.
Gold in the current environment: Central banks around the globe continue to increase their purchases and holdings of gold and central banks have been net gold buyers in recent years. Demand in the official sector remains strong. There is a view that "gold is under owned" by emerging market central banks, who are expected to continue to increase their gold purchases for portfolio diversification purposes in the year ahead. Chinese and Indian gold jewelry demand is expected to remain strong in 2016. These buyers have proven to be price sensitive and price conscious. Dips below the $1,100 per ounce level are seen as a buying opportunity by Chinese and Indian consumers. More and more Wall Street firms are making calls that a bottom in gold is near. Be prepared for the potential for gold to turn higher in 2016.
By Kira Brecht