Federal Reserve May Hike Rates Sooner Rather Than Later

Daily Analysis - 23/02/2017

FOMC Minutes Highlight Willingness to Raise Rates


After significant jawboning about the potential for March’s monetary policy meeting to be “live”, the latest FOMC Meeting minutes underscored the more upbeat assessment of committee which may pave the way for further normalization despite looming government policy risks.

Fed Officials See Further Scope for Rate Hikes

The release of the latest FOMC Meeting Minutes from the decision earlier in the month highlighted policymakers’ willingness to consider raising rates at the next meeting in March should the data remain relatively stable over the near term.  Although not necessarily hawkish in nature, the Committee judged that the biggest risks to the outlook remained the prospect of fiscal stimulus and government policies which continue to add considerable uncertainty.

Nevertheless, they did reiterate that unemployment and inflation that met the Committee’s expectations could make it appropriate to raise rates sooner rather than later.  Furthermore, inflationary pressures were cited as a potential catalyst to raise rates quicker than anticipated by market participants.  Even with the prospect of further tightening, equities managed to extend the latest rally, with Dow futures hitting new heights on Wednesday.


Natural Gas Rebounds From Multi-Month Lows

Natural gas prices briefly extended their most recent plunge on Wednesday, touching 14-week lows of $2.641 per MMBtu before rebounding modestly.  Between a combination of rising shale production and forecasts for what may be the second mildest winter on record in the United States, prices have been steadily falling for the last few sessions as seasonal demand ebbs.

Although traditionally a period of significant inventory drawdowns as household heating needs contribute to stockpile declines, warm weather conditions prevailing across the American northeast alongside forecasts of above average temperatures could plunge prices further.  Baker Hughes also reported an uptick in active gas drill rigs, increased production may also accompany the rise in drilling operations, further complicating the outlook for gas prices.  After rebounding from intraday lows on Wednesday, futures are trading mostly flat.


Mexican GDP Growth Revised Higher

Despite the rhetoric surrounding free trade agreements, the Mexican economy continued to display robust activity during the fourth quarter as evidenced by the latest GDP figures.  The final revision of data showed that gross domestic product for the period rose to 0.70% from a preliminary reading of 0.60% while the annualized figure came in at 2.40%.  For the whole of the calendar year, growth printed at 2.30%, marking a moderate deceleration from 2015’s results.

The quarterly gains were delivered primarily by improvements in the services sector and a modest climb in industrial production while agricultural activity dragged on results for the period.  Helping the economy further was a steep depreciation in the Peso which helped make trade more competitive.  However, a Central Bank initiated swap line of $20 billion designed to help defend the Peso saw the USDMXN fall to its lowest point since November.


Canadian Consumers Take a Pause

Following four months of gains, Canadian consumer momentum saw the earlier improvements rapidly reverse during the month of December after a contraction for both the headline and core retail figures.  The monthly figure was mainly dragged by falling automobile sales which declined by -0.90%, causing the headline data to fall by -0.50% while marking the first dip in sales in five months.  Although rising fuel costs help buoy the figure, falling consumption of food and beverages also weighed on retail activity.

Core retail sales which exclude automobiles also slid, edging -0.30% lower during the period.  Even though the uptick in oil and gas prices will undoubtedly help accelerate economic activity over the near-term, the retail figures underline the unevenness of growth.  After falling against the US dollar on Wednesday, the Canadian dollar is trending marginally higher against its US counterpart, with USDCAD trending back below 1.3150.


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