Fed Opens the Door Wider

Weekly Report - 18/12/2016

US Central Bank Takes More Hawkish Towards 2017 Normalization


After a much-anticipated rate hike, the Federal Reserve managed to surprise market participants with an upwardly revised view of the number of intended rate hikes for the year ahead while downplaying the impact of President-elect Donald Trump’s proposed stimulus.

Last Week

The dominant driver of market momentum in the preceding week was the Federal Reserve as the Open Market Committee opted to raise interest rates to 0.75%.  Besides fueling a spectacular rally in the US dollar, the Central Bank upgraded its path for normalization, forecasting three rate hikes during the next calendar year.  Adding to the optimism was the best consumer price inflation figures in two years.  Other global central banks expressed their enthusiasm with both the Bank of England and Swiss National Bank highlighting the benefits of gradual tightening.  Both the BoE and SNB left interest rates on hold at 0.25% and -0.75% respectively.  However, each institution cited the ability to take monetary policy in either direction depending on how conditions evolve in light of the looming political and economic risk factors.  In other news, Euro Area inflation continues to trend higher, reaching the highest point since April of 2014 for the aggregate area.  China saw fundamentals continue to improve after a significant downturn, with both industrial production and retail sales back on the rise.  Nevertheless, fixed asset investment continued to be a function of public debt creation, feeding concerns that the private sector continues to pull back on investment.


The Week Ahead

With the holidays rapidly approaching, it is time to begin thinking about the Santa Claus rally and the year-end squaring of investment portfolios.  Major global portfolio managers generally use this time to exit positions and wind down their exposure ahead of 2017, trading volumes are likely to fall over the coming two weeks, creating additional volatility, especially in equity markets.  The major upcoming data releases pertain to final third quarter GDP figures from the United States and United Kingdom. Despite upward momentum in employment, wages, and inflation, UK GDP is forecast to remain unchanged at 0.50% quarterly and 2.30% annually.  The final reading of US gross domestic product for the quarter ending in September is expected to be upgraded modestly to 3.30% from the 3.20% reported a month prior.  Durable goods orders will also be reported alongside housing data that includes existing and new home sales.  Aside from the UK and US, Canada is set to release figures relating to October GDP on a month over month basis along with inflation and retail data.  Other areas to watch in the sessions ahead include crude oil, as concerns about rising production loom ahead of the proposed output cuts from OPEC member nations starting January 1st.


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