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mashreq Fixed Income Trading Daily Market Update Sunday, December 06, 2015 Quote of the Day "In order to succeed, we must first believe that we can." (Nikos Kazantzakis) Market Update OPEC decides to follow a higher (not lower) production policy OPEC set a record oil-output ceiling of 31.5 million barrels a day, a level that’s in line with the group’s most recent production estimate. The increase from a previous target of 30 million barrels doesn’t include production from Indonesia, which joined the group after a break of almost seven years. At a meeting Friday in Vienna that was expected to last four hours but expanded to nearly seven, the Organization of Petroleum Exporting Countries tossed aside the idea of limiting production to control prices. Instead, it went all in for the one-year-old Saudi Arabia-led policy of pumping more until rivals, both external as well as internal, are squeezed out of market share. OPEC has set a production target almost without interruption since 1982, though member countries often ignored it and pumped well above it. OPEC output has outstripped it for 18 consecutive months, according to data compiled by Bloomberg. Now the organization says it will keep pumping as much as it does now - about 31.5 million barrels a day - effectively endorsing limitless output. OPEC’s policy is squeezing incomes for its members, whose combined annual revenue could fall to USD550 billion from an average of more than USD1 trillion in the past five years, the International Energy Agency said on November 10. Venezuela, whose foreign currency reserves are at the lowest level in 12 years, led calls for a reduction in output, supported by Ecuador. Saudi Arabian Oil Minister Ali Al Naimi said that the growing global demand could absorb an expected jump in Iranian production in 2016. Meanwhile, Iraqi Oil Minister Adel Abdel Mahdi stated that Iraq would further raise output in 2016 after having steeply increased production in 2015. He added that Iran also had the right to increase output after Western sanctions are lifted. Iranian Oil Minister Bijan Zangeneh said Tehran would be prepared to discuss OPEC quotas or other action only when his country reaches pre-sanction oil output levels. UAE Oil Minister Suhail bin Mohamed Al Mazroui stated that OPEC should cooperate with non-OPEC countries and that the group was open to such discussions. However, the minister said that the oil market would decide when to balance itself. He added that the sustainability of crude supply was more of a concern than worry about prices. (Bloomberg) US Non-Farm payrolls for November beat estimates, further strengthen the case for rate hike this month US non-farm payrolls for November rose by 211,000, beating median estimates of 200,000. The figure for October was revised upward from 271,000 to 298,000. September job gains were also increased by 8,000. The jobless rate held at a more than seven- year low of 5%. A healthy rate of hiring has raised the odds that Fed officials will raise interest rates this month for the first time since 2006. The pace of future increases is contingent on progress toward the central bank’s inflation goal and probably depends on how quickly wage pressures mount as the job market tightens. There is now a 74% probability that the Fed will hike rates in its next meeting scheduled for 15-16 December. Employee pay increased at a slower pace last month. Average hourly earnings at private employers rose 0.2% in November after a 0.4% gain. Hourly pay climbed 2.3% in November from the same month last year after a 2.5% increase in October. Employment in November was spurred by the biggest increase in construction hiring since January 2014. Retailers, health- care providers and leisure and hospitality companies added jobs at a healthy, but slower pace than in October. Construction companies took on 46,000 workers, led by residential specialty contractors, while payrolls at retailers rose by almost 31,000 in November, a step down from the month before. Payroll estimates of 91 economists ranged from gains of 130,000 to 275,000. Derived from a separate Labor Department survey of households, the underemployment rate, which adds in part-time workers who’d prefer full-time positions and people who want to work but have given up looking, crept up to 9.9% from 9.8% in October. The labor force participation rate rose to 62.5% from 62.4%. Participation has declined this year as part of a broader trend that Janet Yellen has said is related to the aging of the US population. “I don’t think we should expect to see labor force participation move up a great deal over time,” she told the Joint Economic Committee of Congress on Thursday. “If it were simply stable over time rather than on that declining trend, I think we would be absorbing people who were perhaps discouraged,” Yellen also said. (Bloomberg) US trade deficit widens as exports hit three-year low According to the Commerce Department, US trade deficit widened unexpectedly in October 2015 as exports fell to a three-year low, suggesting that trade could again weigh on economic growth in the 4Q2015. The trade gap rose 3.4% to USD43.9 billion, a sign that the worst of the drag from a stronger dollar was far from over. September's trade deficit was revised up to USD42.5 billion from the previously reported USD40.8 billion. The government revised trade figures going back to April to incorporate more comprehensive and updated quarterly and monthly data. Trade subtracted 0.22% from GDP in 3Q2015, which expanded at a 2.1% annual rate. The dollar's 18.6% appreciation against the currencies of the US’ main trading partners since June 2014 has eroded export growth. Exports fell 1.4% to USD184.1 billion, the lowest level since October 2012. Imports dipped 0.6% to USD228.0 billion in October 2015. (Reuters) Janet Yellen and other FOMC members signal a rate hike this month US Federal Reserve chairwoman Janet Yellen told US Congress on Thursday that the economy is reaching a point where it can handle an interest rate rise. She said that raising interest rates would show "how far our economy has come in recovering from the effects of the financial crisis". Yellen told the congressional Joint Economic Committee that household spending appeared “solid” and a rate hike this month was a “live option.” Her remarks come after a string of data indicated a strengthening US economy, although the testimony took placed before the release of November’s NFP figures on Friday. Manufacturing data released on Thursday showed factory orders in October rose after two months of decline. New orders were up 1.5%. Ms Yellen recognised that the slowing global economy and a stronger dollar had had an impact on the US, but said consumer and business spending along with housing investment was still strong. “Ongoing gains in the labour market, coupled with my judgement that longer-term inflation expectations remain reasonably well anchored, serve to bolster my confidence in a return of inflation to 2%," Ms Yellen said. Chair Yellen said a rate of 100,000 new jobs per month would be enough to sustain the labour market. She also indicated that she expected this growth to help raise wages which have been mostly stagnant since the financial crisis. "I would expect to see some upward pressure on wages - I think we've seen some welcome hints," she said. (BBC) Federal Reserve Bank of Atlanta President Dennis Lockhart said he favors raising interest rates this month, adding to signs that the central bank will proceed with its first increase since 2006. “Absent information that drastically changes the economic picture and outlook, I feel the case for liftoff is compelling,” Lockhart said in the text of remarks Wednesday in Florida. The Atlanta Fed official said employment gains have clearly met the FOMC’s desire for further improvement as a criterion for liftoff. “I think the economy is closing in on full employment,” which would suggest stronger wage gains, Lockhart said. “The trend in wage growth has been weak for some time, but it may be picking up.” Inflation hasn’t met the Fed’s target of 2%, but that’s because of transitory factors including falling energy prices and a stronger US dollar, Lockhart said. The Dallas Fed’s trimmed-mean measure of prices, which excludes outlying price changes, has gained 1.7% over the past year, Lockhart said. (Bloomberg) Federal Reserve Bank of St. Louis President James Bullard said the US central bank’s policy setting is “extreme” and it’s time to start moving the benchmark lending rate and balance sheet “toward more normal levels.” “I continue to be an advocate for beginning policy normalization,” Bullard told a Philadelphia Fed conference on Friday, according to his prepared remarks. Bullard is a voting member of the policy-setting Federal Open Market Committee in 2016. “My argument has been that the FOMC’s goals have been met, while the FOMC’s policy settings remain extreme,” he said. “Prudent policy suggests edging the policy rate and the balance sheet toward more normal levels.” (Bloomberg) Page 1 mashreq Fixed Income Trading Daily Market Update Sunday, December 06, 2015 ECB announces expansion in monetary stimulus with cut in deposit rate and extension of asset purchase program The European Central Bank (ECB) moved to bolster the eurozone economic recovery by cutting a key interest rate and extending its stimulus programme.