In what was the most widely telegraphed (or worse kept secrets) ever, the Fed wrapped up 2016 with a December interest rate increase just like it did in 2015. The statement was generally positive highlighting solid job gains, an expanding US economy and rising household spending. The Fed also noted inflation is increasing but remains below its 2% long-term target. No mention was made of foreign economies or developments, indicating the Fed isn’t seeing any big offshore risks at the moment.
The Fed member projections were generally bullish on employment and GDP. The dot plot had four members calling for 2 rate hikes in 2017, six members expecting 3 hikes and four members expecting 4 hikes. The street has taken this to mean the Fed is looking toward 3 rate hikes in 2017 up from two hikes considered by the dot plot in September. This is a middle of the road projection as I had been thinking 2 hikes and the US Dollar had been pricing in 4 hikes. The statement indicated the central bank is looking at only gradual increases so the street may still be ahead of itself on hawkishness.
On the news US Dollar rallied moderately but was unable to break through its recent high near 102.00, while gold, JPY, EUR, GBP, AUD, NZD and CAD have all been trading moderately lower on the news.
The Dow took another run at 20,000 but faltered short of that big round number and turned back downward with other major indices
starting to decline in tandem. indicating that traders recognize a higher US Dollar is bearish for short-term earnings prospects due to its negative impact on US exports, tourism and travel and on the overseas earnings of US companies. For a while now I have been saying that between the high USD and high US stocks something has to give; at the moment it looks like stocks may be peaking and starting a downward correction particularly with the Dow accelerating downward into the close.
In her press conference, Fed Chair Yellen downplayed the changes in Fed member forecasts as “tiny” and “modest” adjustments indicating that changes in fiscal policy could change the economic and monetary policy outlook. It seems some members factored in fiscal policy changes but she thinks it’s too early to judge what impact the incoming Trump administration may have on the economy. She did call the rate hike a vote of confidence in the US economy and stressed gradual hikes with the fed funds rate not far below its neutral rate which is low by historical standards.
Essentially she struck an optimistic tone on the economy but remains cautious on the outlook for monetary policy. She did indicate she has had limited contact with the Trump team, does not plan to give them any advice and believes in the independence of the Fed clearly trying to set the tone for the last full year of her term.
It’s a huge day for news and things are really just getting started. Three more central bank decisions are on the way from the Swiss National Bank, the Bank of England and Norges Bank. None of these meetings are expected to result in any changes but economic and monetary policy outlooks could impact trading in CHF, GBP and NOK.
It is also a big day for economic data. Australia’s employment figures are expected to show another increase. Traders may also focus on whether the 40K increase in full-time jobs was sustainable or a one-time event. AUD has been retreating ahead of the news with USD climbing.
PMI reports may also drive some trading action by giving the first indication of whether the post-US election honeymoon has continued into December. NZD could be active around the New Zealand PMI report. Reports from Japan, Germany, France and the US may also spark trading activity. UK retail sales could keep the focus on Sterling for trading with a number of additional reports also due for the US including consumer price inflation, jobless claims and more.
Energy markets have been active through the day and may remain so through Thursday’s natural gas storage levels. A deep freeze in many parts of North American could lead to a bigger drawdown in this week’s report or next week’s numbers. WTI Crude oil tried to rally on a bigger than expected DOE inventory drawdown but that as short-lived with traders unable to shake off yesterday’s big surprise API build. WTI has embarked on another leg down following the Fed meeting but remains above the $50.00 level.
There have been no major announcements after the US close today.
Significant announcements released overnight include:
US FOMC Fed Funds Rate 0.25% increase to 0.50% - 0.75% as expected
Member projections for 2017
GDP 2.1% up from 2.0%
Unemployment rate 4.5% down from 4.6%
Core PCE inflation 1.8% unchanged
Fed Funds Dot plot
0 increases 0.75% 0
1 increase to 1.00% 2
2 increases to 1.25% 4
3 increases to 1.50% 6
4 increases to 1.75% 4
6 increases to 2.25% 1
US retail sales 0.1% vs street 0.3% vs previous 0.8%
US retail ex auto 0.2% vs street 0.4% vs previous 0.8%
US producer prices 1.3% vs street 0.9%
US core PPI 1.6% vs street 1.3%
US industrial production (0.4%) vs street (0.3%)
US DOE crude oil inventories (2.5 mmbbls) vs street (1.5 mmbbls)
US DOE gasoline inventories 0.5 mmbbls vs street 2.0 mmbbls
Canada Teranet house prices 11.9% vs previous 11.8%
UK jobless claims change 2K vs street 6K vs previous 9K
UK average weekly earnings 2.5% vs street 2.3%
UK unemployment rate 4.8% as expected
UK employment change (6K) vs street 50K
Eurozone industrial production 0.6% vs street 0.8% vs previous 1.2%
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 AEDT NZ Business PMI previous 55.2
11:30 am AEDT Australia employment change street 17K vs previous 11K
11:30 am AEDT Australia full-time jobs previous 41K
11:30 am AEDT Australia part-time jobs previous (31K)
11:30 am AEDT Australia unemployment rate street 5.6%
11:30 am AEDT Japan flash manufacturing PMI previous 51.3
4:00 pm AEDT Singapore retail sales street 0.3%
8:00 am GMT France flash manufacturing PMI street 51.8
8:00 am GMT France flash service PMI street 51.9
8:30 am GMT Germany flash manufacturing PMI street 54.5
8:30 am GMT Germany flash service PMI street 54.9
8:30 am GMT Switzerland SNB interest rate (0.25%) to (1.25%) no change
8:30 am GMT Switzerland SNG deposit rate (0.75%) no change expected
9:00 am GMT Norway Norges Bank interest rate 0.50% no change expected
9:30 am GMT UK retail sales street 5.9% vs previous 7.4%
9:30 am GMT UK retail ex auto street 6.0% vs previous 7.6%
12:00 pm GMT UK Bank of England decision 0.25% and £435B QE no change
8:30 am EST US consumer prices street 1.7%
8:30 am EST US core CPI street 2.2%
8:30 am EST US real average weekly earnings previous 0.9%
8:30 am EST US jobless claims street 255K
8:30 am EST US Philadelphia Fed street 9.1 vs previous 7.6
8:30 am EST Canada manufacturing sales street 0.4%
9:45 am EST US flash manufacturing PMI street 54.5
10:30 am EST US natural gas street (124 BCF) vs previous (42 BCF)
10:30 am EST Bank of Canada financial system review report
11:15 am EST Bank of Canada Poloz press conference
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