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Federal Reserve Attempts to Restore Credibility

FOMC Meeting Minutes Confirm Central Bank Officials Believe a Rate Hike is Appropriate

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Matching the sentiment expressed by financial markets, the Federal Reserve confirmed in its latest meeting minutes from the November FOMC decision that a rate hike would be appropriate “relatively soon.”  The result was even greater traction in the US dollar which rose to a new 13.5 year high on the back of expectations of further policy normalization.

Federal Reserve’s Credibility at Stake


With the Federal Reserve echoing the prevailing hawkishness of financial markets, the stage is officially set for a December rate hike as Central Bank officials increasingly shift their stance.  According to the meeting minutes from November, most policymakers saw the risks as roughly balanced.  Despite expectations that the balance sheet will remain larger than normal for an extended period of time, the Federal Reserve is showing increasing concern about its own credibility.  As a result, unless there is a major economic shock before the December decision, the next rate increase is likely to go off without a hitch.  Furthermore, futures are showing that the likelihood of further action in 2017 has risen sharply.  Meanwhile, major US stock indices closed at fresh highs except for the Nasdaq Composite which was weighed down by technology earnings.

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Gold Slammed Lower After US Durable Goods Data


Following a better than anticipated uptick in durable goods orders, gold prices were sold heavily, falling back below the $1200 per troy ounce level and kept under pressure following the FOMC meeting minutes.  Durable goods orders printed at 4.80% month over month in October, demonstrating the best gains since October of 2015.  Besides durable goods and the upbeat manufacturing PMI reading was consumer confidence reaching the highest point in 6 months. With optimism prevailing about the outlook and the Federal Reserve telegraphing the potential for December action, haven assets continue to experience outflows.  Immediately after the durable goods data was reported, a steep selloff sent dollar-denominated gold prices tumbling to the lowest point since February.

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Oil Volatility Cools


In spite of numerous factors that could potentially prevent a deal from taking off during OPEC’s semiannual meeting in Vienna next week, oil price volatility has calmed notably ahead of the Thanksgiving holiday hours.  Reports that Russia is reluctant to cut its own production to help support prices has raised speculation that the inclusion of non-OPEC members in any output freeze arrangement may fail to materialize.  Furthermore, US production is back on the rise, climbing to 8.690 million barrels per day last week as the number of active drill rigs continues to climb.  According to oil services giant Baker Hughes, the oil drill rig count rose to the highest point since January, reaching 474 in the 24th week of gains over the last 26 weeks.  Oil prices are under pressure even after an inventory report showed falling oil stockpiles.

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German Quarterly Growth Meets Estimates


In another sign that growth in the Euro Area core is cooling, German gross domestic product was confirmed at 0.20% growth during the third quarter, matching forecasts and marking the slowest expansion since the third quarter of 2015.  Although the expectations for the annualized figure were a more upbeat 1.70%, the actual figure came in at 1.50%.  The main drag on the figures continued to be trade, which was a net negative for economic activity.  Domestic consumption combined with government spending were the primary drivers of GDP growth while investment continues to stagnate.  Tapering growth has raised concerns that the German economy is headed for a pullback.  The DAX 30 equity benchmark is carrying over the previous session’s losses, remaining on the retreat and reflecting index losses spreading globally.

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