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Federal Reserve Lifts Rates Again

Daily Analysis - 16/03/2017

Equity Markets Rally as More Cautious FOMC Tone Sinks US Dollar

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The US Federal Reserve raised its benchmark interest rate for the second time in three months by a quarter point amidst growing confidence that the economy is better placed to withstand gradual monetary policy tightening.

Yellen Sounds Less Hawkish


News of the widely-anticipated rate hike hammered government bond yields lower while major equity indices rallied higher. What came as a relief to investors was assurances from Federal Reserve Chair Janet Yellen that any further rate hikes this year will be gradual. She further noted that the US economy was heading strongly toward the Central Bank’s employment and price stability goals, giving her confidence that if economic activity evolved as is currently anticipated, the Fed would gradually raise the federal funds rate.

Most market participants had feared that Wednesday’s official FOMC Statement and economic projections would point to a faster pace of rate increases throughout this year. Dow futures are surging in Thursday trade, with the benchmark nearing the psychologically important 21000-mark after extending gains from Wednesday’s session.

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Australian Unemployment Touches 13-Month High


In an unexpected development, Australian joblessness surprisingly rose in February, validating the Reserve Bank's decision to leave interest rates at record lows. The unemployment rate climbed to 5.90% last month, compared with the average analysts' estimate for a stable rate of 5.70%. The number of positions fell by 6,400 in February, also missing forecasts of an increase of 16,000. Over the past year, the unemployment rate in the country has hovered between 5.60% - 5.80%.

However, underemployment, where people willing to work are unable to find a position, is close to historic highs. The Reserve Bank of Australia has repeatedly emphasized that labour market uncertainty remains the key risk for 2017. Economists reckon if the unemployment rate rises sharply in the coming months, the Central Bank will cut rates further.  AUDUSD has sharply reversed off the highs for the month and is currently sitting just above the 0.7670-mark.

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South Africa Retail Sales Underwhelm


Data delivered earlier by Statistics South Africa revealed that retail sales dipped by -2.30% year-over-year through the end of January, following a revised 1.00% rise in December. Analysts surveyed by Reuters had projected a 1.20% year-on-year rise in January. Instead, sales fell by -1.20% on a month-over-month basis, and edged up 0.70% for the three months through January, compared to the corresponding period a year earlier.

With consumer spending accounting for almost 60.00% of the country’s gross domestic product, if the downward trend continues and consumer confidence continues to remain depressed, first quarter growth figures are more than likely to underwhelm. The prevailing longer-term USDZAR trend lower accelerated following the release of data as the US dollar continues to sell off, reaching as low as 12.7160 before bouncing modestly.

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UK Jobless Rate Reaches Fresh 11-Year Low


The jobless rate in the UK surprisingly fell to a new 11-year low in January, while wage inflation decelerated more than anticipated.  Official data released by the Office for National Statistics on Wednesday showed the unemployment rate dropped to hit 4.70% in the three months ending January 31st, coming in below expectations of a steady 4.80%. Wages, excluding bonuses, rose by 2.30%, missing the consensus estimate of a 2.50% gain.

The improved employment scenario is not matched by upward pressure on wages, suggesting that even when jobs are relatively abundant and the cost of living is picking up, workers are unable or unwilling to press for higher pay packets. Despite a major climb in GBPUSD following the Fed decision, FTSE 100 June futures continue to trend higher, trading just shy of record highs for the UK equity benchmark.

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