The FOMC Hikes

Daily Analysis - 17/12/2015

Federal Reserve Raises Benchmark Interest Rate for the First Time Since 2006

The long awaited rate hike from the Federal Reserve met expectations with the announcement of a 25 basis point hike to 0.50% after trending near 0.25% for the better part of 7 years. The market reaction was very calm considering the anticipation of renewed volatility and directional momentum from the interest rate decision.

UK Unemployment Falls

The United Kingdom Office for National Statistics reported the unemployment rate falling to 5.20% in October, the least since May of 2008, from 5.30% in the prior month. Claims for unemployment, rose to 3,900 in November following a revised 200 in October. Total pay growth slowed to 2.40% from 3.00% in the third quarter. Excluding bonuses, wages increased 2.00% in October alone, the weakest month since January. If productivity improves, that will allow companies to increase wages without generating inflationary pressures. However, if companies if they can only meet increased demand by employing more workers, labor shortages could force them to lift pay to fill vacancies, putting pressure on costs and stoking price gains. With the UK economy operating close to capacity, the labor market is being carefully watched by Bank of England policymakers as they weigh raising interest rates for the first time since 2007.

Euro Area Inflation Gains

Consumer prices rose at an annual pace of 0.20% in November, exceeding both previous and forecasted values of 0.10%. The value recorded is the highest rate since July in a sign that asset purchases are starting to show a positive impact. The main factor behind the modest increase in inflation as a whole was the lessening influence of weak energy prices. The monthly consumer price change was -0.10%, slightly higher than the expected -0.20%, but lower from October’s 0.10%. The annualized core inflation rate was recorded at 0.90%. In particular, inflation in the services sector, the biggest of the Euro Zone economy, was 1.20% in November, slightly lower than the 1.30% rise recorded in October. Despite the small gain in inflation, Euro Area prices remain subdued, forcing the ECB to remain accommodative and consider expanding the pace of purchases to see a demonstrable uptick in inflation.

Hawkish Fed Hikes Rates

After the all-time low interest of 0.25% imposed by the Federal Reserve in December 2008, the FOMC announced its unanimous decision to raise rates by 25 basis points to 0.50%. Policymakers based liftoff on the recent slew of positive economic data and by reiterating their confidence that the inflation target will be met. According to the projections, the Federal Reserve plans to lift rates further over the next three years, with current expectations showing 1.40% by the end of 2016, implying 4 rate hikes in the coming year. Furthermore, the Central Bank said its policy stance would remain “accommodative” even after the increase with plans to keep a close eye on the inflation rate as it progresses towards the 2.00% target. Economic projections were largely unchanged from September, with unemployment anticipated to fall to 4.70% next year and economic growth to reach 2.40%

New Zealand GDP Jump

New Zealand third quarter GDP growth smashed estimates, moving substantially higher in the third quarter with the final revision higher than both previous and anticipated results. The data showed that the country’s economy grew 0.90% in the third quarter of 2015 beating the 0.80% forecasted by economists and previous estimate of 0.30%. This report emphasized the fastest pace of quarterly growth in over a year. On an annualized basis, the country’s GDP grew 2.30%, matching analyst expectations. This week, New Zealand’s Institute of Economic Research published its quarterly consensus forecast predicting that the island nation’s economy would expand 0.60% in the third quarter of 2015. The services sector, which accounts for a large proportion of the economy, expanded by 0.90% during the quarter, led by business services, retail sales, accommodation, and transport services. The NZDUSD has been weaker since the announcement, falling nearly 100 pips following the Federal Reserve announcement.