Rate hike speculation topped the agenda last week for financial markets after a number of prominent Federal Reserve officials including Chairwoman Janet Yellen took a more hawkish stance towards the gradual approach to tightening policy. After numerous suggestions that the end of the era of easy monetary policy and low interest rates was fast approaching, tools that track the probability of a 0.25% increase in the benchmark like the CME Group’s FedWatch tool priced-in a 79.70% likelihood of action as of Friday.
The PCE report was of key importance, as it showed inflation continuing to trend higher towards the Fed’s preferred 2.00% target, helping build the rate hike case. However, GDP missed forecasts of a revision higher, remaining stable compared to the first estimates. In Canada, despite a modest deceleration, GDP managed to remain in positive territory as the Bank of Canada kept policy on hold, leaving interest rates at 0.50%. The remainder of the week’s events centered predominantly on manufacturing PMI’s reported from across the globe, with nearly all in North America, Europe, and Asia manufacturing activity remaining in expansionary territory. Nevertheless, an abundance of political headwinds emerged, especially after Scotland raised the prospect of another referendum to remain a part of the UK.