FOMC Proves More Hawkish

Daily Analysis - 05/01/2017

December Meeting Minutes Show Surprising Uncertainty About Timing of Future Hikes

The minutes from the December FOMC meeting stressed that Federal Reserve officials were all on board the latest move to hike interest rates by a quarter point amid unease about the path of fiscal policy after President-elect Donald Trump is inaugurated. Furthermore, the minutes highlighted the potential for a quicker pace of tightening than previously indicated.

Fed Wary of Fiscal Policy

With many anxious that the US Federal Reserve might ultimately be forced to quicken the pace of interest-rate increases to head off higher inflation, Federal Reserve officials concentrated on the impact of potential fiscal stimulus during their December policy meeting.

The majority on the committee echoed that a “gradual” pace of rate hikes over the coming years would probably remain appropriate, even though growing attention to the risks of increased government spending and tax cuts could spur faster growth than currently forecast.

Traders now see a rate hike by June as highly likely, according to prices of Fed Funds futures, which were little changed after the minutes were released. The Dow Jones Industrial Average rose 60.40 points, or 0.30%, to close at 19,942.16, after coming within just 44 points of the 20,000 level.

Euro Area Inflation Surges

Echoing data from Germany earlier in the week, preliminary consumer price index figures reported for December from the Euro Area showed surprisingly strong growth. The headline annualized CPI number came in at 1.10%, marking the fastest pace of price growth since September of 2013 as the impact of the European Central Bank’s policy measures are more widely felt throughout the economy.

The predominant drivers of these gains were rebounding energy prices with the surge higher in oil prices over the last few months contributing to upside pressures. Other catalysts for this improvement were growth in the prices for services and food, each of which climbed 1.20% year over year.

After leveling out against the Pound on Wednesday, the Euro is back on the climb against Sterling, with GBPUSD trending back above 0.8550.

UK Construction Continues to Rebound

With the worst case “Brexit” scenario failing to materialize, UK fundamentals continue to show broad-based improvements as evidenced by the latest construction figures reported on Wednesday. The monthly Construction PMI survey put out by the Charted Institute of Purchasing and Supply showed the sector expanding by the most in 9-months.

The one item that was evident from the data is increasing inflationary pressures following the massive Pound devaluation that resulted from the referendum. Importers are passing these costs along to producers which will eventually distribute higher prices to consumers, adding to inflationary upside. As a result, the ability for the Bank of England to ease monetary policy further from current levels may face difficulties, especially with unemployment at an 11-year low.

Meanwhile, the weakness in the Pound has seen the FTSE 100 hit a new intraday record in early Thursday trade.

Chinese Services Sector Expansion Accelerates

In another sign of improving fundamentals amid the backdrop of the weaker Yuan, China’ services sector experienced a pickup in growth during the month of December according to Markit Economics. The Caixin Services PMI rose from 53.1 in November to 53.4 in December, displaying the fastest pace of expansion in the figure in 17-months.

Driven primarily by new orders and an improved outlook from local businesses, the only soft spot was employment growth which cooled. Furthermore, the ongoing depreciation in the Yuan is rapidly contributing to rising input costs for the sector.

However, in a sign that the People’s Bank of China is responding to the rapid decline in the currency, it experienced its largest one-day climb in a year, extending those gains in Thursday trade.