Financial Markets Gear Up For Another Rate Hike

Daily Analysis - 07/05/2017

FOMC Strikes Hawkish Tone Paving the Way for June Tightening

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A confluence of better US data from the employment standpoint combined with a dismissal of the recent slowdown in economic activity was enough to spur heightened expectations that the US Central Bank will adjust interest rates higher during the June meeting as the gradual tightening of monetary policy continues.

Last Week


Apart from French election fervor, the major focal point of financial markets last week was the US Federal Reserve.  Official US payroll data came in much stronger than anticipated after job creation climbed by 211,000 for April.  Despite the lower revision of March numbers, the unemployment rate unexpectedly fell to 4.40%, helping bolster the Federal Reserve’s rate hike case. Though the FOMC took no action on the policy front, they indicated that sluggish first quarter growth was just a passing factor, spurring a 78.50% likelihood of a June hike in Fed Funds futures according to the CME Group.

Moving towards Asia, Chinese fundamentals displayed some concerning developments, with both manufacturing and services PMI figures pulling back closer to the 50.0 expansionary-contractionary threshold.  Both the official and Caixin figures highlighted the same trends, which should worry policymakers working to cool momentum in the housing market.  Apart from China, European fundamentals were mixed at best after unemployment remained on hold at 9.50% while GDP managed to accelerate modestly to 0.50% expansion on a quarterly basis.  Commodities slipped lower throughout the week, with gold prices falling back below the $1250 per troy ounce level even after the Euro hit multi-month highs against the US dollar.

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The Week Ahead


Volatility will be the name of the game when the weekly reopening kicks off, especially with the French election results being tallied following the Sunday vote. Apart from the political spectrum which will continue to focus on geopolitical hotspots like North Korea, data due throughout the week will predominantly highlight monetary policy and inflation.  Both the Bank of England and the Reserve Bank of New Zealand are set to report their latest decisions, with interest rates expected to remain on hold at 0.25% and 1.75% respectively as each central bank awaits more data before determining the outlook for policy.

Shifting gears, the United States will be reporting on consumer price inflation for the month of April, with both the headline and core figures expected to remain at or above the Federal Reserve’s 2.00% target on an annualized basis.  For China, consumer prices are forecast to pick up modestly to 1.10% on a headline basis whereas producer prices are projected to experience decelerating growth, likely the function of falling commodity prices.  Aside from inflation, China will also be announcing the latest trade figures, with the surplus set to expand significantly despite an anticipated pullback in both import and export growth momentum.

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