FOMC Delivered on First and Last Hike of 2016

15 December, 2016

European Outlook: Asian stock markets mostly headed south, after the FED did the expected and hiked rates by 25 bp. Japanese markets outperform and the Nikkei closed with a slight gain as the Yen dropped while in Hong Kong property shares came under fresh pressure amid rising mortgage costs and punitive taxes. U.K. stock futures are also down, after broad losses on Wall Street yesterday, but U.S. futures are already picking up again. European bond futures, which rose going into the Fed decision, are likely to be knocked back and the Bund futures already headed sharply south in after hour trade yesterday. Oil prices dropped and the front end WTI future is trading around USD 51 per barrel. Gold collapsed to under USD 1144 following the “3 next year” comments. In Europe the data calendar is pretty empty and policy announcements from BoE, SNB and Norges Bank are not expected to hold major surprises, with all central banks seen on hold. The BoE is likely to reaffirm its neutral stance, while the SNB will repeat again that it remains ready to intervene on forex markets if needed, as the Franc remains overvalued. EU leaders start gathering for the last summit of 2016 today with upcoming Brexit talks likely high on the agenda.

FOMC Delivered on First and Last Hike of 2016: The Fed finally delivered on its threat to boost the Fed funds target range to 0.50-0.75%, narrowly slipping in the second hike of the lost decade with two weeks left to go before year-end. While entirely discounted by the markets given well-placed and consistent smoke signals from the Fed, it also stretched its “dot plot” forecasts to include three more hikes in 2017. The statement noted the “decline” in the jobless rate and a “considerable” uptick in inflation compensation as well.

Australia employment surged 39.1k in November, much stronger than expected, after a revised 15.2k gain in October (was +9.8k). It was the largest one month gain this year. The unemployment rate rose to 5.7% from 5.6%. Full time jobs jumped 39.3k after a 41.5k gain. Part time employment was nearly flat (-0.2k) following the 30.5k drop in October. The participation rate picked-up to 64.6% from 64.4%. This is a strong report that underpins expectations for no change from the RBA for an extended period.

The U.S. Data Yesterday: Revealed a surprisingly weak round of Q4 retail sales figures that trimmed Q4 GDP estimates to 1.3% from 1.8%, following an assumed Q3 boost to 3.4% from 3.2%. We also saw a weaker than expected November industrial production report thanks to a huge weather-induced utility decline over the past three months alongside an unexpected November vehicle assembly rate drop. The October business inventory figures tracked assumptions, though these figures combined with the weak November sales and factory data suggest that the inventory reversal is proving slow to materialize. The November PPI figures bucked the day’s pattern of weak reports, with 0.4% headline and core-price gains that reflected strength in service prices alongside the expected pause in the energy price climb.

Main Macro Events Today                

BOE Preview – The BoE’s Monetary Policy Committee met for the final time in 2016 and an unanimous decisions to leave the repo rate at 0.25% and the QE total at GBP 435 bln, is widely anticipated. The minutes are expected to reaffirm the neutral stance that was established last month.

SNB Preview – The SNB’s quarterly policy review is not expected to bring any surprises, with the bank widely expected to keep rates and general policy parameters unchanged. The central bank is almost sure to stress once again that it remains willing and ready to intervene in currency markets to keep the franc from running higher. A foray further into negative interest rate policy also remains in the arsenal, but is unlikely to be applied just yet. This will leave the focus not just on updated growth and inflation projections, but also comments on the domestic side effects of the SNB’s policy and developments on mortgage and property markets as Switzerland enjoys the quiet holiday period, before the political thunderstorms in Europe next year, when Brexit talks are set to start and France, Germany, the Netherlands face key elections, that have the potential to undermine the stability of the EU and EMU.


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