Fed Raises Interest Rate for First Time in a Year

Daily Analysis - 15/12/2016

US Central Bank Raises Interest Rates by Quarter Percent While Promising Additional Action in 2017

In a widely anticipated move, Federal Reserve voting members determined a rate hike was appropriate during the latest interest rate decision, moving the benchmark to 0.75% from 0.50%. Although a dovish statement was expected, the Fed surprised markets by proposing a quicker timeline for raising rates.

Fed Full of Surprises

Although the FOMC decided to raise rates by 25 basis points, the move to accelerate the pace of future tightening caught financial markets off guard. According to the statement, the Federal Reserve is currently anticipating three rate hikes for 2017 instead of the two hikes projected in September, adding to the hawkishness of the latest decision as the economy approaches full employment. The dollar immediately reacted to the development, with the US Dollar index rising to a 14-year high while slamming precious metals and stocks lower. During the press conference, Federal Reserve Chair Janet Yellen was repeatedly questioned about President-elect Trump’s proposed stimulus measures. In her remarks, she stated that the economy might not require stimulus and that instead the government should pay more attention to the debt-to-GDP ratio. Gold fell precipitously following the announcement, tumbling as low as $1134.81 per troy ounce.

Australian Unemployment Back on the Rise

Following the disappointing revelation that the Australian economy had contracted by -0.50% during the third quarter, Australian unemployment is mirroring the slide in other economic metrics. According to the latest jobless figures, the unemployment rate rose to a 3-month high of 5.70% during the month of November compared to 5.60% reported a month earlier. Despite adding 39,100 jobs during the month, mainly in the form of full-time jobs, 17,000 people were added to the ranks of the nation’s unemployed. However, in a positive sign, the labor force participation rate rose on a seasonally adjusted basis to 64.60% from 64.40% a month prior. However, the weakening economic backdrop could translate to additional increases in the unemployment rate as officials work to reverse the third quarter decline. After falling steeply following the Fed decision, AUDUSD remains under pressure despite trading flat on the session.

US Crude Production Soars to the Upside

With the OPEC deal gradually fading from focus, the attention has now been turned to the US energy landscape as production continues to gain on the back of higher crude oil prices. The evidence comes from last week’s drill rig count which rose by 21 rigs to 498 total in operation according to oil services giant Baker Hughes. Accompanying this gain in drill rigs was one of the largest increases in US oil output in recent memory, with production climbing nearly 100,000 to 8.796 million barrels per day compared to 8.697 a week earlier. Even though oil in onshore storage fell by more than expected during the same period, Cushing inventories continue to build, rising to the highest point since early June. Stockpile figures are higher than a year earlier across the board, adding to storage concerns. After tumbling Wednesday, WTI is trending back towards $51.00 per barrel.

French Fundamentals Pickup Further

In a sign of further improvement, the French economy continues to show positive gains on nearly all fronts. The latest preliminary December figures for services and manufacturing purchasing managers’ indices rose dramatically, smashing expectations. The Manufacturing PMI rose from 51.7 to 53.5 while services climbed to 52.6 from 51.6 in November. This corresponds with recent inflation data which showed consumer prices in the country rising to the highest point in 25-months. All the signs are pointing towards sustained improvements in the economy, with the one lingering issue being exceptionally high unemployment. Should policymakers be able to confront this problem, it could set the stage for further gains in inflation over the medium-term. In the meantime, the French CAC 40 is slightly higher on the session following the data, erasing the previous session’s losses.