s had been widely expected, the FOMC raised the US fed funds rate for the first time in 9 years today by 0.25%, getting up off zero and into the 0.25% to 0.50%. On the news we saw some initial choppiness in stocks and currencies but trading essentially went as I had suggested earlier on with stocks initially falling slightly then taking off while USD rose briefly then resumed its downtrend.
Fed Chair Yellen had previously indicated that interest rate liftoff should be seen as a positive signal about the prospects for the US economy and the Fed confirmed this by raising its GDP forecast and lowering its unemployment rate forecast for 2016. Better than expected earnings from FedEx and Oracle after the close certainly don’t hurt either.
The decision was unanimous and as expected the statement indicated that the Fed expects to raise rates gradually from here. The dot plot of member expectations narrowed significantly with 16 of 17 members looking for 1-4 rate hikes with three hikes the most popular forecast the 7 members. I agree with this which would mean increases in March, June and December, skipping September to stay away from the election campaign.
Historically in the last decade when the Fed has made a hawkish move at its December meeting stocks have fallen in the first half of the month but made it all back and more in the second half. Today’s gains on the back of the Fed news indicate that sentiment among traders about 2016 continues to improve and that the Santa Claus Rally may have finally arrived, better late than never.
One market that has gone its own way, however, is crude oil which turned south again after a large surprise increase in US DOE inventories (which have been all over the place lately). WTI has been testing $35.00/bbl again and could remain active while traders try to figure out if its bottoming out or setting up for another drive to the downside.
FedEx $2.58 vs street $2.50, maintains 2016 yr guidance of $10.40-$10.90
Oracle $0.63 vs street $0.60
Significant announcements released overnight include:
4:45 pm EST NZ Q3 GDP 2.3% as expected and previous 2.4%
US FOMC interest rate lower bound 0.25% increase to 0.25% expected
US FOMC interest rate upper bound 0.25% increase to 0.50% expected
Fed 2016 target midpoints
GDP raised to 2.4% from 2.3% (hawkish)
PCE inflation cut to 1.6% from 1.7% (dovish)
Unemployment rate cut to 4.7% from 4.8% (hawkish)
Fed funds end 2016 neutral at 1.4% (implies 4 0.25% rate hikes in 2016)
US housing starts 1,173K vs street 1,130K
US building permits 1,289K vs street 1,150K
US industrial production (0.6%) vs street (0.2%)
US manufacturing production 0.0% as expected
US flash manufacturing PMI 51.3 vs street 52.6
US DOE crude oil inventories 4.8 mmbbls vs street (1.5 mmbbls)
US DOE gasoline inventories 1.7 mmbbls vs street 1.0 mmbbls
France flash manufacturing PMI 51.6 vs street 50.6
France flash service PMI 50.0 vs street 50.8
Germany flash manufacturing PMI 53.0 vs street 52.8
Germany flash service PMI 55.4 vs street 55.5
UK jobless claims 4K vs street 1K
UK average weekly earnings 3M/yr 2.4% vs street 2.5%
UK unemployment rate 5.2% vs street 5.3%
UK 3M employment change 207K vs street 150K vs previous 177K
Upcoming significant economic announcements include:
(Note: 11:30 am in Sydney/Melbourne is currently 1:30 pm in Auckland, 4:30 pm in Vancouver, 7:30 pm in Toronto/Montréal, 12:30 am in London and 8:30 am in Singapore)
8:30 am GMT Sweden unemployment rate street 6.6%
9:00 am GMT Norway interest rate 0.75% no change expected
9:00 am GMT Germany IFO bus climate street 109.0
9:00 am GMT Germany IFO expectations street 105.0
9:30 am GMT UK retail sales street 3.0%
9:30 am GMT UK retail ex auto and fuel street 2.2%
11:00 am GMT UK CBI orders street (10)
1:00 pm GMT Bank of Poland meeting minutes
1:00 pm GMT Poland industrial output street 5.7%
1:00 pm GMT Poland construction output street (3.9%)
1:00 pm GMT Poland producer prices street (2.0%)
1:00 pm GMT Poland retail sales street 2.2%
8:30 am EST US jobless claims street 275K
8:30 am EST US Philadelphia Fed street 1.0
10:00 am EST US leading index street 0.1%
10:30 am EST US natural gas street (42 BCF)
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