Fed set to raise rates. Fed set to raise rates. Fed set to raise rates. Fed set to raise rates. Fed set to raise rates. The coming week’s USmonetary policy meeting (Wed) could be of historicimportance. The FOMC is expected to raise interestrates (by 0.25%) for the first time since June 2006.The recent slide in oil and commodity prices as awhole has prompted some speculation that the FOMCmay back off, as they seemingly did in September.However, this time around the FOMC seems to havesent a more emphatic message. In the statementafter its October meeting, the FOMC strongly hintedthat interest rates would be raised in Decemberunless there was a deterioration in economicconditions. Most Fed speakers since then havereiterated that message. In particular, the labourmarket, which the FOMC has highlighted as the keyarea it would be watching, has been much strongerthan expected. With financial markets now puttingclose to an 80% probability on a rate rise, it wouldprobably now be a major blow to the Fed’s credibilityif it did not follow up with some action.

Emphasis on “gradual” policy path. Emphasis on “gradual” policy path. Emphasis on “gradual” policy path. Emphasis on “gradual” policy path. Emphasis on “gradual” policy path. Attentionis already turning to what happens after the initial Fedmove. The FOMC has for some time been stressingthat any further interest rate increases will take place'gradually' and that interest rates will likely peak at alow level by historic standards. Fed Chair Yellen is likelyto use her press conference to reiterate this message.Certainly, with inflation still running well below theFOMC's target and some ongoing headwinds toeconomic growth, including sluggish expansions in anumber of other countries, the FOMC will want to movecautiously. It will also wish to avoid a potentially sharpadverse market reaction to its initial hike and the bestmeans of achieving this will be to emphasise theirintention to move slowly. Moreover, Yellen will wantto ensure strong Committee support for this firsttightening. Current signs are that, while a majority of

FED TO DAMPEN CHRISTMAS CHEER

Source: Haver Analytics

CHART 2: Inflation on the way up?

UPCOMING GLOBALHIGHLIGHTS

FOMC meeting

US CPI (Nov)

Euro area ‘flash’ PMIs (Nov)

German IFO (Dec)

German ZEW (Dec)

BoJ policy meeting

China Retail sales (Nov)

China Industrial production(Nov)

The coming week’sFOMC meeting isexpected to seethe first rise in USpolicy rates foralmost ten years

• Fed to raise rates but sound cautious about further movesFed to raise rates but sound cautious about further movesFed to raise rates but sound cautious about further movesFed to raise rates but sound cautious about further movesFed to raise rates but sound cautious about further moves• Inflation to pick up in November in US and UKInflation to pick up in November in US and UKInflation to pick up in November in US and UKInflation to pick up in November in US and UKInflation to pick up in November in US and UK• Black Friday could help to boost UK retail salesBlack Friday could help to boost UK retail salesBlack Friday could help to boost UK retail salesBlack Friday could help to boost UK retail salesBlack Friday could help to boost UK retail sales

UPCOMING UKHIGHLIGHTS

CPI/RPI (Nov)

Labour market (Oct/Nov)

Retail sales (Nov)

Source: Bloomberg

CHART 1: Market sees a high chance of a Dec Fed hike

COMMERCIAL BANKING

the FOMC are in favour of raising rates, some membersstill have reservations. It will be easier to prevent atleast some of these voting against a tighteningmotion if the FOMC's overall message is fairlycautious. However, what the Fed means by ‘gradual’may not be the same as that assumed by markets. TheFOMC’s current median forecast implies four raterises next year. It may temper this but that still leavesplenty of room for market volatility.

Inflation rInflation rInflation rInflation rInflation rebounding for nowebounding for nowebounding for nowebounding for nowebounding for now. . . . . November CPIinflation data in the US and the UK (both Tues) andthe final update for the euro area (Wed) are all likely toshow annual headline inflation higher than in October.Whether this trend continues in part depends onwhether commodity prices now stabilise. In the UKlabour market data for October (Wed) are forecast toshow further strong employment growth. However,the annual rise in earnings seems set to decelerate.Unfavourable comparisons with the same period ayear ago suggest that this slowdown could persist fora few months, which will remove the most obviousrecent sign of building cost pressures. Novemberretail sales data (Thurs) include “Black Friday”. Thisadds to the challenge of seasonal adjustment ofconsumer spending data at this time of year, meaningthat the potential for a surprise is high.

Mixed messages from other central banks. Mixed messages from other central banks. Mixed messages from other central banks. Mixed messages from other central banks. Mixed messages from other central banks. Thecoming week will also see central bank policy meetingsin Sweden (Tues), Norway (Thurs) and Japan (Fri). Policyis expected to be unchanged in Sweden and Japan butthere are expectations of 0.25% deposit rate cut inNorway. In the euro area, the December ZEW and IFOsurveys for Germany and the ‘flash’ PMIs for the region asa whole will provide further updates on Q4 economicactivity. They are expected to show growth continuingat a moderate pace.

CONTRIBUTORS

Rhys HerbertRhys HerbertRhys HerbertRhys HerbertRhys HerbertSenior EconomistT: 020 7158 1743

Michael SawickiMichael SawickiMichael SawickiMichael SawickiMichael SawickiSenior EconomistT: 020 7158 1746

MARKETING COMMUNICATIONECONOMIC DATA ANALYSISFRIDAY 11 December 2015

0%10%20%30%40%50%60%70%80%90%

Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15

Implied probability of a move up in Fed Funds target rate at December 2015 meeting

-3.0%-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%

2006 2008 2010 2012 2014

US

UK

%Ch y/y

UK DATA PREVIEW FRIDAY 11 DECEMBER 2015

CPI/RPI (Nov) CPI inflation held below zero in October 2015 for a second successivemonth. This was despite a firming of the ‘core’ rate to 1.1% thatprincipally reflected larger price rises for clothing and footwear relativeto last year. For November, while evidence from the BRC shop priceindex suggests that prices in ‘core’ goods categories remain underpressure, the mapping for the key components has weakened recently,and a further uptick in the core rate still looks likely. Moreover, despitefurther recent declines in oil prices, energy-related base effects areset to help inflation overall move back to positive readings. Overall, weexpect CPI inflation at 0.1% y/y in November. Meanwhile, last month’sstriking weakness of RPI inflation - which fell to just 0.7% y/y - also seemslikely to unwind. Housing and weight-related components of the RPI-CPI basis should help to push up the rate to 1.1% y/y.

CHART: Inflation set to start grindingupwards from November

SOURCE: ONS, LBCB calculations

Labour Market Data(Oct/Nov)

Following a soft patch over Q2, the UK labour market has seen a returnto sustained growth of employment in Q3, with an expansion of 177kon the quarter driving the unemployment rate to 5.3%, the lowestsince mid-2008. As the timelier claimant measure of unemploymenthas seen little change since the end of Q2, data for the 3 months toOctober are unlikely to herald any marked change in employmentmomentum. We expect an unchanged unemployment rate at 5.3%and employment growth of 161k on 3 months ago. Trends in earningsgrowth are set to be of much greater interest. With the DecemberMPC minutes acknowledging that wage growth has ‘flattened off’,adverse base effects are likely to see the pace over the 3 months toOctober slow still further, to 2.2% and 2.4% on regular and total payrespectively. Pay growth seems unlikely to recover meaningfully untilH2 2016, despite firm readings on leading indicators. We expect theMPC to instead focus on measures of ‘unit’ costs in months to come.

CHART: Lead indicator of earnings growthhas been well ahead of official data

SOURCE: ONS, KPMG/Markit, LBCB calculations

Retail sales (Nov) After an outsized 1.7% m/m gain in September, headline retail salesfell back by 0.6% in October - the weakest print since March, taking theannual growth rate down to 3.8%. Already available indicators of retailspending for November have been on the soft side, with BRC’smeasure of sales growth slipping a little. Moreover, anecdotal reportsof consumers disappointed by ’Black Friday’ promotions suggest thatsome sales may have been pushed into the December reportingperiod. Still, weekly sales data from some specific retailers, notablyJohn Lewis, show little of this effect. And, the pace of discounting islikely to have remained strong overall over the course of the month.Taken together, we look for further easing in the pace of retail volumegrowth, to 3.2%. But this would still be consistent with a robust gain of0.7% on the month, consistent with household spending remaining akey driver of GDP growth in Q4.

CHART: Little-changed BRC growth ratestill implies November uptick in sales

SOURCE: ONS, BRC

Y/YLBCB 0.9% 2.5%Cons 0.6% 2.3%Prev -0.9% 3.0%

M/Mex fuel

Y/YLBCB 0.7% 3.2%Cons 0.6% 3.2%Prev -0.6% 3.8%

M/Minc fuel

-1

0

1

2

3

4

5

6

2011 2012 2013 2014 2015 2016 2017

CPI

RPIforecast

%

BoE's CPI target

-2-10123456789

Jan-14 Jul-14 Jan-15 Jul-15

BRC valuesONS volumesONS values

%

-4

-3

-2

-1

0

1

2

-4

-2

0

2

4

6

8

'01 '03 '05 '07 '09 '11 '13 '15

Average earnings

3m/12m % change (rhs)

REC permanent salaries balance

(lhs)regular

LBCB 2.4% 2.2%Cons 2.5% 2.3%Prev 3.0% 2.5%

totalEarnings

ILOLBCB 0.0k 5.3%Cons 0.8k 5.3%Prev 3.3k 5.3%

ClaimantU rate

Y/YLBCB 0.1% 1.1%Cons -0.1% 0.9%Prev 0.0% 0.7%

M/MRPI

Y/YLBCB 0.0% 0.1%Cons -0.1% 0.1%Prev 0.1% -0.1%

M/MCPI

ECONOMIC DATA AND EVENTS CALENDARCOUNTRY TIME RELEASE/EVENT PERIOD CONSENSUS FORECAST PREVIOUS

CH 05:30 Retail Sales Nov (11.1%) -- (11.0%)CH 05:30 Industrial Production Nov (5.7%) -- (5.6%)CH 05:30 Fixed Assets Investment (YTD) Nov (10.1%) -- (10.2%)

JN 23:50 BoJ Tankan Report 4Q

UK 00:01 Rightmove House Prices Dec -- -- -1.3% (6.2%)JN 04:30 Industrial Production Oct (F) -- -- 1.4% (-1.4%)JN 04:30 Capacity Utilization Oct -- -- 1.5%JN 04:30 Tertiary Industry Index Oct 0.5% -- -0.4%EZ 10:00 Industrial Production Oct 0.3% (1.4%) 0.3% (1.3%) -0.3% (1.7%)EZ 10:00 ECB's Nowotny Briefs with IMF on Article 4 MissionEZ 11:00 ECB President Draghi speaks at conference in Bologna, ItalyUK 12:00 BoE Deputy Governor Shafik Speaks at Institute of Directors in LondonEZ 15:00 ECB's Costa, Krugman Speak at Conference in Lisbon

SW 08:30 Riksbank Interest Rate Decision and Monetary Policy Report 15-Dec -0.35% -0.35% -0.35%UK 09:30 CPI Nov -0.1% (0.1%) 0.0% (0.1%) 0.1% (-0.1%)UK 09:30 Core CPI (excluding food and energy) Nov (1.2%) (1.3%) (1.1%)UK 09:30 Retail Price Index Nov 259.5 259.9 259.5UK 09:30 RPI Nov -0.1% (0.9%) 0.2% (1.1%) 0.0% (0.7%)UK 09:30 RPIX Nov (1.0%) (1.2%) (0.8%)UK 09:30 PPI Input Nov -1.0% (-12.4%) -1.1% (-12.5%) 0.2% (-12.1%)UK 09:30 PPI Output Nov -0.1% (-1.3%) 0.0% (-1.2%) 0.0% (-1.3%)UK 09:30 PPI Output Core Nov 0.0% (0.1%) 0.0% (0.1%) -0.1% (0.3%)UK 09:30 ONS House Prices Oct -- -- (6.1%)EZ 10:00 Employment 3Q -- -- 0.3% (0.8%)GE 10:00 ZEW Survey Current Situation Dec 54.0 54.0 54.4GE 10:00 ZEW Survey Expectations Dec 15.0 16.0 10.4US 13:30 Empire Manufacturing Dec -6.0 -4.0 -10.7US 13:30 CPI Nov 0.0% (0.5%) 0.0% (0.5%) 0.2% (0.2%)US 13:30 Core CPI (excluding food and energy) Nov 0.2% (2.0%) 0.2% (2.0%) 0.2% (1.9%)US 15:00 NAHB Housing Market Index Dec 63.0 63.0 62.0

JN 06:00 Machine Tool Orders Nov (F) -- -- (-17.9%)FR 08:00 Manufacturing PMI Dec (P) 50.6 -- 50.6FR 08:00 Services PMI Dec (P) 50.8 -- 51.0FR 08:00 Composite PMI Dec (P) 51.0 -- 51.0GE 08:30 Manufacturing PMI Dec (P) 52.8 52.7 52.9GE 08:30 Services PMI Dec (P) 55.5 55.4 55.6GE 08:30 Composite PMI Dec (P) 55.0 55.0 55.2EZ 09:00 Manufacturing PMI Dec (P) 52.8 52.6 52.8EZ 09:00 Services PMI Dec (P) 54.0 54.2 54.2EZ 09:00 Composite PMI Dec (P) 54.2 54.2 54.2UK 09:30 Claimant Count Rate Nov 2.3% 2.3% 2.3%UK 09:30 Jobless Claims Change Nov 0.8k 0.0k 3.3kUK 09:30 Average Weekly Earnings including bonuses (3m/12m) Oct (2.5%) (2.4%) (3.0%)UK 09:30 Average Weekly Earnings excluding bonuses (3m/12m) Oct (2.3%) (2.2%) (2.5%)UK 09:30 ILO Unemployment Rate Oct 5.3% 5.3% 5.3%UK 09:30 Employment Change (3m/3m) Oct (150k) (161k) (177k)EZ 10:00 Trade Balance Oct €21.8b -- €20.1bEZ 10:00 CPI Nov (F) -0.2% (0.1%) -0.2% (0.1%) 0.1% (0.1)EZ 10:00 Core CPI (excluding food and energy) Nov (F) (0.9%) (0.9%) (1.1%)US 13:30 Housing Starts Nov 1140k 1120k 1060kUS 13:30 Building Permits Nov 1160k 1172k 1150kUS 14:15 Industrial Production Nov -0.1% 0.2% -0.2%US 14:15 Capacity Utilization Nov 77.4% 77.6% 77.5%US 14:15 Manufacturing Production Nov 0.1% 0.1% 0.4%US 14:45 Markit Manufacturing PMI Dec (P) 52.6 53.0 52.8US 19:00 FOMC Rate Decision (Upper Bound) 16-Dec 0.50% 0.50% 0.25%US 19:00 FOMC Rate Decision (Lower Bound) 16-Dec 0.25% 0.25% 0.00%JN 23:50 Trade Balance Nov -¥442.7b -- ¥111.5bJN 23:50 Exports Nov (-1.6%) -- (-2.1%)JN 23:50 Imports Nov (-7.5%) -- (-13.4%)

SATURDAY 12 DECEMBER

SUNDAY 13 DECEMBER

MONDAY 14 DECEMBER

TUESDAY 15 DECEMBER

WEDNESDAY 16 DECEMBER

ECONOMIC DATA AND EVENTS CALENDARCOUNTRY TIME RELEASE/EVENT PERIOD CONSENSUS FORECAST PREVIOUS

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SME & CORPORATE MARKETS

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NO 09:00 Norges Bank Policy Decision and Olsen Press Conference 17-Dec 0.75% -- 0.75%GE 09:00 IFO Business Climate Dec 109.1 109.2 109.0GE 09:00 IFO Current Assessment Dec 113.4 113.6 113.4GE 09:00 IFO Expectations Dec 105.0 104.9 104.7EZ 09:00 ECB publishes Economic BulletinUK 09:30 Retail Sales Excluding Automotive Fuel Nov 0.6% (2.3%) 0.9% (2.5%) -0.9% (3.0%)UK 09:30 Retail Sales Including Automotive Fuel Nov 0.6% (3.2%) 0.7% (3.2%) -0.6% (3.8%)EZ 10:00 Construction Output Oct -- -- -0.4% (1.8%)UK 10:30 UK to Sell £700m 1.25% Index-Linked 2032 BondsUK 11:00 CBI Industrial Trends Total Orders Dec -10.0 -- -11.0US 13:30 Current Account Balance 3Q -$122.1b -$114.3b -$109.7bUS 13:30 Philadelphia Fed Business Outlook Dec 1.5 3.5 1.9US 13:30 Initial Jobless Claims 12-Dec 270k 270k 282kUS 15:00 Leading Index Nov 0.1% 0.1% 0.6%US 18:00 US to Sell $16bn 5-Year TIPS ReopeningFR 21:00 Business Confidence Dec 101.0 -- 102.0FR 21:00 Manufacturing Confidence Dec 102.0 -- 102.0

CH 01:30 China November Property PricesCH 01:45 MNI December Business IndicatorJN 03:00 BoJ Annual Rise in Monetary Base 18-Dec ¥80.0t ¥80.0t ¥80.0tJN 03:00 Bank of Japan Policy Statement/Kuroda Press ConferenceEZ 09:00 Current Account Balance Oct -- -- €29.4bUS 14:45 Markit Services PMI Dec (P) 56.0 -- 56.1US 14:45 Markit Composite PMI Dec (P) -- -- 55.9US 16:00 Kansas City Fed Manufacturing Activity Dec -- -- 1.0US 18:00 Fed's Lacker Gives 2016 Economic Outlook at Charlotte Chamber

FRIDAY 18 DECEMBER

Bold text denote those releases/events that are expected to attract most market attention.Data in brackets denote YoY unless stated otherwise. Market consensus estimates are taken from Bloomberg on the date of publication.* Released overnight, (r) revised, (p) preliminary, (f) final

THURSDAY 17 DECEMBER