World Week Ahead: Amid Oil Market Turmoil, Fed To Hold Key Meeting

WRAP: It's now clear that the past month's jaw-dropping slide in oil prices--a breakdown that accelerated even further last week, as the price of crude dropped below $60--has the potential to be a highly disruptive event. The question now is whether the boost that lower oil prices bring to spending power can sufficiently outweigh the disruptions they are causing in financial settings-- the risk of default on oil producers' bonds, for example, of the fallout from a plummeting ruble. The initial reaction from economists has been to emphasize the positives, but markets are clearly nervous about unforeseen side-effects from such a big decline in such an important commodity. It doesn't help that this is happening at a moment in which the Federal Reserve is toying with plans to increase rates, either, a policy shift that will introduce yet more uncertainty to the financial environment. As such, by far the most important event in the forthcoming week is the conclusion of the Federal Open Market Committee's meeting on Wednesday. How much of a nod the Fed's statement gives to either the positives or the negatives of falling oil prices will help investors gauge what monetary conditions to expect over the next few months.

MONDAY

INDIA: Time N/A. November foreign trade statistics. [In October, imports rose 3.62% on year, exports fell 5.04% and the trade balance posted a deficit of $13.36 billion.]

India's domestic economy is showing signs of improvement. Where it faces challenges is in the global economy, where weak demand for its exports continues to leave India's external balances compromised. Exports are weak and imports are rising, helping to perpetuate a troublesome trade deficit. There aren't many reasons to assume this situation improved in November.

U.S.: 9:15 a.m. EST. November industrial production & capacity utilization. [Industrial output expected +0.8% on-month vs. -0.1% in October; capacity utilization expected 79.4% vs. 78.9%.]

Last month's decline in the index represented a modest and to-be-expected retracement from the big 0.8% on-month gain in September. Economists expect a reciprocal bounce-back to have occurred in November. Year-to-date industrial production is up 4%, marking a welcome acceleration from the sluggish performance of recent years and offering another sign that the U.S. economy is gaining momentum.

U.K.: Time N/A. Chancellor George Osborne speech at the Economic Club of New York.

Mr. Osborne's Autumn Statement, released earlier this month, included plans to close loopholes for hedge fund managers and private equity funds that would require them to pay income tax on hidden fees.

AUSTRALIA: 7:30 p.m. EST. (11:30 a.m. Tuesday, Sydney) Reserve Bank of Australia monetary policy meeting minutes.

In an interview with the Australian Financial Review on Friday, RBA Governor Glenn Stevens said he'd prefer to see the Australian dollar at $0.75. That sent the Aussie sliding to around 82 cents. The questions are whether this reflects the view of many on the RBA and whether there's any plan to push the currency lower with more interest rate cuts. The minutes to the last meeting will determine whether such matters were discussed there.

CHINA: 8:45 p.m. EST. (9:45 a.m Monday, Beijing.) HSBC Markit December preliminary "flash" purchasing managers' index. [At end-November, PMI was 50.]

This indicator's fall to a six-month low to land right on the 50 threshold that would signify a contraction was one of the pieces of data that triggered a rate cut last month by the People's Bank of China. If there are no other signs of a rebound, speculation will grow that the PBOC and central government will take further measures to stimulate the economy.

TUESDAY

U.K.: 2 a.m. EST. (7 a.m., London). The Prudential Regulatory Authority publishes bank stress test results.

This is an important test of the capital adequacy of Britain's eight biggest banks. The PRA has said it will be tougher than recent tests in the eurozone and one bank, the Co-Operative Bank, has already warned that it will probably fail the test. The test uses a hypothetical scenario of sharply rising interest rates, a 3.5% drop in GDP from fourth-quarter 2013 levels, and a 30% drop in commercial real estate prices. Banks have to ride out that turmoil with a ratio of capital to risk adjusted assets of at least 4.5%.

SWEDEN: 3:30 a.m (9:30 a.m., Stockholm). Sveriges Riksbank monetary policy announcement.

With deflation pressures rising in Sweden due to falling oil prices, there's a good chance the Riksbank will take its repo rate, currently at zero, into modestly negative territory in a bid to encourage spending and investment.

EUROZONE: December flash purchasing manager indexes.

--FRANCE: 3 a.m. EST. (9 a.m., Paris). [Expected manufacturing PMI 48.6 vs. 47.9 end-November; expected services 48.6 vs. 48.4.] --GERMANY: 3:30 a.m. (9:30 a.m, Berlin.) [Expected manufacturing PMI 50.2 vs. 49.5 end-November; expected services 52.5 vs. 52.1.] --EUROZONE: 4 a.m. (10 a.m, Brussels) [Expected manufacturing PMI 50.5 vs. 50.1 end-November; expected services 51.4 vs. 51.1; expected composite 51.5 vs. 51.1.]

Economists are expecting a very modest improvement in business activity, but that's not saying much. European firms are still making heavy weather of it.

U.K.: 4:30 a.m. EST. (9:30 a.m, London) November monthly inflation figures. [In October, consumer price index was +0.1% on-month, +1.3% on-year; core CPI was +0.2% on-month, +1.5% on year; core producer price index was +0.1% on-month, +0.9% on-year.]

The U.K.'s annual inflation rate has come a long way down over the past three years -- it only seems like yesterday that British inflation was at 5% in the fall of 2011. This decrease is one of the main reasons why the Bank of England has pulled back from what previously looked like a march toward an imminent rate hike.

GERMANY: 5 a.m. EST. (11 a.m, Berlin). ZEW Research Institute's December indicator of economic sentiment. [Current conditions index expected +5.5 vs. +3.3 in November; economic expectations seen +18.0 vs. +11.5 in November.]

Sentiment among German economists is seen defying the overall gloomy trend in the eurozone. So long as this is an accurate view of where the economy is headed that's good news for the regional economy. But it could just as well capture the problematic, bubble-like isolation of German thought leaders. Detached from the hardships of other countries in the eurozone, their domestically derived sense that all will be OK feeds into the Deutsche Bundesbank's hardline resistance to having the European Central Bank buy sovereign bonds to stimulate the eurozone economy.

U.S.: November housings starts and building permits. [Expected housing starts +2.9% on month at annualized 1.038 million units, vs. -2.8% on-month in October; building permits were down 0.5% on-month to 1.08 million annualized, vs. +4.8% on-month in October.]

Volatility in the multi-family homes sector, which is prone to big swings month-to-month, helped drag down the housing starts numbers in October, but activity in the single-family sector remained strong. A relatively mild November, weather-wise, will hopefully allow a continuation of that trend.

SOUTH KOREA: 4 p.m. (6 a.m. Seoul, Wednesday). November producer price index. [In October, the PPI was down 0.7% on-month and down 0.6% on-year.]

Plunging energy prices likely drove this indicator deeper into deflation territory last month, but it's not just the oil selloff that's preventing South Korean prices from rising; the country's internal economic weakness is also a contributor. Another weak number here will add to pressure on the Bank of Korea to make another rate cut.

JAPAN: 6:50 p.m. EST. (8:50 a.m. Wednesday, Tokyo). November provisional trade statistics. [Trade balance expected deficit ¥996 billion vs. -¥710 billion in October; in prior month: exports +9.6% on-year, imports +2.7% on-year.]

Economists are clearly looking at October's big jump in exports as an anomaly, foreseeing another widening in the deficit in November. If we do see another strong performance, however, it will boost the impression that the weaker yen is finally having an effect on exports.

WEDNESDAY

U.K.: 4:30 a.m. EST. (9:30 a.m., London). Bank of England monetary policy committee minutes.

This will be the last time the minutes are released with a lag. They will now be released at the conclusion of each meeting -- meetings that will now come very six weeks rather than every four. The thinking behind this shift to more transparency was likely discussed at the last meeting. More importantly, so was the rationale behind the 7-2 decision to make no change in policy. The minutes could help shed light on the BOE's gradual shift to a more dovish stance and could reveal the committee's thoughts on the economic impact of key issues such as the rout in oil prices.

CZECH REPUBLIC: 7 a.m. EST. (1 p.m, Prague). Czech National Bank monetary policy decision.

With its benchmark rate at 0.05%, the central bank is running out of policy tools to fight a mounting deflationary threat.

U.S.: 8:30 a.m. EST. November consumer price index. [CPI expected -0.2% on month vs. unchanged in October; core CPI expected +0.1% on month vs. +0.2% in October.]

Falling gasoline prices will inevitably drag down the headline inflation number. The question is whether that energy effect is starting to feed into core CPI measures, too. If so, it will be taken as one argument in favor of the Fed slowing down its march toward a rate hike.

U.S.: 2 p.m. EST. The Federal Open Market Committee statement on monetary policy, followed at 2:30 p.m. by a press conference by Chairwoman Janet Yellen.

Until U.S. markets were hit with turmoil last week, it was widely thought that the Fed would at this meeting remove the phrase "considerable time" to describe the wait for its first rate hike since 2006. But with oil markets in a spin and global financial stability on the rise, might the committee again choose to wait? Either way, Ms. Yellen's press conference will be a hotly followed affair, potentially offering a key marker in the Fed's move toward a rate hike.

GREECE: Time N/A. Parliament votes on a new president.

The buildup to this vote has restored volatility in Greek bonds. That's because there's a risk that if parties can't agree on a new President that the country will go back to a general election and that the anti-euro Syriza party, which is now gaining in polls, could in that event grab the balance of power. That would make it much harder for Greece to reach an agreement with its EU creditors to roll over debt and would raise the specter of default. There's much at stake, especially given the jittery state of eurozone bond markets last week.

THURSDAY

GERMANY: 4 a.m. EST. (10 a.m., Berlin) December Ifo Business Climate Index. [Expected current situations index 110.5 vs. 110 in November; expected business climate index 105.5 vs. 104.7; expected business expectations index 100.5 vs. 99.7.]

As with the ZEW indicator, this number is seen capturing an improvement in business sentiment. The resilience of German industrialists is impressive.

RUSSIA: 4 a.m (12 p.m. EST.) Russian President Vladimir Putin holds annual news conference.

With the ruble in freefall as oil prices plummet and the economy slowing while the Russian central bank is forced to raise rates against its interests, you'd think Mr. Putin would be in a hot spot politically. But polls are showing continued record-high support for him. Expect the same self-assured bravado to pervade this event, regardless of the crisis in which the Russian economy has now fallen.

FRIDAY

JAPAN: Time N/A. Bank of Japan monetary policy decision.

There's not much more the Bank of Japan can do right now to boost the economy. And with the energy-importing country considered one of the biggest beneficiaries of the fall in oil prices, the BOJ is now receiving some supplemental stimulus help.

GERMANY: 2 a.m. EST. (8 a.m., Berlin) November producer price index. [PPI expected -0.2% on-month, unchanged from October; expected -1.1% on-year vs. -1.0% in October.]

Despite the optimism of German economists and businessmen, there is clear evidence of deflationary pressure in the German economy. The PPI is inordinately dragged down by falling oil prices, of course, but it's nonetheless remarkable how this clear breach of price stability hasn't led German policymakers to embrace a more proactive deflation-fighting strategy from the ECB.

U.S.: 10 a.m. EST. (9 a.m., Chicago). Federal Reserve Bank of Chicago President Charles Evans speaks at Chicago Fed's Annual Summit on Regional Competitiveness.

Two days on from the FOMC's last meeting of the year, Mr. Evans might be reluctant to take an outspoken position on monetary policy. However, he does hold some strong views, which tend very much toward the dovish side. If he does address the policy outlook, it will be interesting to see if he is swayed toward a more cautious approach on rates by the turmoil in markets and the disinflationary effect of oil prices.

U.S.: Time N/A. Federal Reserve Bank of Richmond President Jeffrey Lacker speaks at Charlotte Chamber of Commerce conference.

Timed alongside Mr. Evans, we will get a very different perspective from Mr. Lacker, who occupies the more hawkish wing of the FOMC.