Fed Strikes More Hawkish Stance

Daily Analysis - 14/12/2017

FOMC Anticipating Three More Rate Hikes for 2018

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In a widely expected move, the US Federal Open Market Committee raised the Federal Funds rate by 25 basis points to 1.50% on Wednesday.  Although the Central Bank left the inflation outlook unchanged, it upgraded growth forecasts and revised the employment projection to below 4.00% all while planning to increase the pace of balance sheet reduction to $20 billion per month in January.

Dollar Dumps Despite Fed Hike


The Federal Reserve decided to hike interest rates for the third time this year, bringing the key rate up to 1.50% despite the uneven inflation backdrop.  Figures released by the US Bureau of Labor Statistics highlighted this trend, with annualized CPI trending higher to 2.20% while the comparable core figure fell to 1.70% for the twelve months ended in November.  Even though the Fed dot plot pointed towards three additional increases in 2018, there were two dissenting votes from Neil Kashkari and Charlie Evans, who believe that inflation should reach the target before any further adjustments.  In her final press conference, Federal Reserve Chair Janet Yellen underscored the potential for the tax plan to contribute to growth momentum, a remark accompanied by upgraded growth forecasts.  Despite the hawkish announcement, the dollar nosedived, with the EURUSD pair climbing as much as 100 pips on Wednesday before trimming gains to 1.1820.

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People’s Bank of China Surprises With Its Own Rate Hike


Overnight figures released from China displayed no major fireworks after announcing progress in retail sales which grew by 10.20% compared to the 10.00% annualized figure reported in October. While fixed asset investment managed to match estimates, arriving at 7.20% for the same annualized period, industrial production fell slightly to 6.10% in November as efforts to reduce emissions and pollution harmed growth.  However, the People’s Bank of China did opt to raise short-term borrowing costs in response to the Federal Reserve’s earlier moves to hike interest rates.  The one-year lending rate was raised to 3.25% alongside a 5 basis point increase for the rate pertaining to bank reserves.  Although policymakers hope the moves will help thwart more capital outflows, they remain concerned that a changing US tax environment and higher rates will attract Chinese funds.  After nearly falling to 6.6000, USDCNH has rebounded from earlier lows to hover above 6.6100.

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Oil Shrugs Off US Stockpile Decline


The amount of crude oil held in onshore US storage facilities fell again last week, sliding by 5.177 million barrels following a 5.610 million barrel contraction a week earlier.  However, despite marking a fourth straight week of drawdowns, gasoline inventories rose by 5.664 million barrels, almost entirely offsetting the unrefined stockpile decrease.  Furthermore, US production reached 9.780 million barrels per day, the highest amount since recordkeeping began in 1983.  Even though OPEC was able to bring the entire cartel’s daily production beneath 32.500 million barrels per day, a magnificent feat considering its past failures to control output, US production is quickly rising and offsetting these efforts.  Should growing demand forecast by OPEC fail to materialize, US producers may capitalize on higher prices to add more production, potentially preventing any further advance in futures prices.  WTI futures are slightly higher on the session, trending at $56.78 ahead of the European market open.

 

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Australian Labour Economy Shows Further Improvement


Data released overnight pertaining to employment showed that Australia’s jobless rate held fast at a 56-month low of 5.40% during November, matching the consensus estimate and the prior month’s reading.  According to the Australian Bureau of Statistics, the participation rate edged higher to 65.50% as the number of employed individuals rose by 61,600, marking the largest gain in over two years.  Even though foreign trade and sluggish inflation have seen the Reserve Bank maintain its ongoing accommodative stance, should employment growth be accompanied by higher wages, the stage could eventually be set for a degree of rate tightening.  In the meantime, growth and trade will remain two areas to keep close watch of for any signs of how the global export economy is behaving and the state of Australian consumers.  Meanwhile, the Australian dollar is extending gains against its US counterpart for a fourth straight session, bringing AUDUSD above 0.7660.

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