Fed Rate Hike Speculation Climbs Further

Daily Analysis - 16/02/2017

Rising Probability of earlier interest rate action


The latest figures pertaining to consumer prices showed that headline inflation is climbing at the fastest pace since 2012 in another positive sign for the Federal Reserve’s ambitious rate hike plans.  Although not the Fed’s preferred inflation gauge, it shows that progress towards the 2.00% has been significant.

US Inflation Another Feather in the Fed’s Cap

Following comments from Federal Reserve Chairwoman during testimony in front of congress, one of the last remaining elements necessary for raising rates managed to top expectations by a wide margin.  Besides the employment component of the Fed’s mandate, the other important target relates to the 2.00% inflation target.  With headline inflation coming in at 2.50%, the highest rate of gains since March of 2012, the Federal Reserve may be forced to consider higher rates at the approaching FOMC Meeting scheduled for March.

Adding to the likelihood of additional policy tightening is core inflation that has been above 2.00% for fifteen straight months along with stronger retail momentum.  According to the CME Group’s FedWatch tool, the probability of March action has now risen to 31.00% from just 17.70% two days earlier.  While the US dollar initially reacted positively, sending gold below $1220, the precious metal managed a late session recovery.


Australian Unemployment Rate Dips Modestly

Despite highly accommodative measures taken in the monetary policy arena, the Australian economy continues to face lower than desired inflation and weaker growth following a surprise contraction during the third quarter.  However, in a modestly positive sign for the outlook, the jobless rate came down slightly to 5.70% from the 5.80% reported a month earlier.  Although the labor force participation rate fell slightly, the number of unemployed individuals fell by 19,300 during the month of January after the jobless rate hit a 6-month high in December.

Nevertheless, despite the positive job creation traction and record low interest rates, risks to the outlook remain significant, accounting for projections of additional rate cuts during the second quarter if economic conditions fail to show further improvement.  The Australian dollar has found itself under renewed pressure despite the results, with AUDUSD falling to just above 0.7700.


US Crude Oil Inventories Reach New Record

Although OPEC has been quick to cheerlead the output deal’s progress, it remains evident that new competition is rapidly arising thanks to higher prices.  US output has continued to rise, trending just shy of the 9.000 million barrel per day production level as onshore crude oil inventories continue to climb.

According to the latest figures from the Energy Information Administration, US stockpiles rose by 9.527 million barrels last week compared to forecasts of a 3.513 million barrel build and a 12.830 million barrel injection a week earlier.  This rapid rise in inventories has driven US stockpiles to a new record of 518.100 million barrels of oil now being held in storage, compared to the previous record of 512.095 reached back in April of 2016.  However, crude futures surprisingly did not fall on the announcement, instead closing the Wednesday session mostly flat and continuing to trade sideways.


UK Unemployment Remains at 11-Year Low

The jobless rate in the UK for the final three months of 2016 managed to remain at 11-year lows of 4.80%, matching the consensus forecast of economists as the workforce participation rate managed to reach a record high 74.60% during the period.  Besides the positivity on a headline basis, this figure underlines the fact that the economy remains robust despite the looming risks associated with triggering Article 50 next month.

Adding to the optimism was the upgraded growth outlook published by the European Commission earlier in the week.  Forecasts are calling for 1.50% GDP expansion over the 2017 calendar year compared to just 1.00% projected during the Autumn report.  After closing mostly flat on Wednesday, the Pound is trending slightly higher versus the dollar in early European trade.


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