FOMC Ready to Forge Ahead With Higher Rates

Weekly Report - 27/11/2016

Stronger Data and Improved Outlook Set the Stage for December Action


As markets prepare for upcoming unemployment data and the second reading of US GDP, the Federal Reserve is building its case for action on rates, with the latest FOMC meeting minutes confirming the Fed’s shifting stance.  Should the data remain positive leading up to December’s decision, there will be little standing in the way of further normalization.

Last Week

The post-election rally in risk assets continued last week, with US equity indices reaching new record highs as markets digest the substance of Donald Trump’s proposed fiscal policy measures.  The US dollar hit a new 13.5 year high against a basket of currencies, driven in large part by the notion that the market believes a December interest rate hike is a near certainty.  Helping to improve the case for higher rates was a major uptick in durable goods orders while the housing sector received fresh positive news in the form of existing home sales.  Although new home sales dented that optimism, an upgrade manufacturing purchasing managers’ index was enough to maintain positive sentiment.  The stronger backdrop for the US dollar saw precious metals and other haven assets retreat.  Gold fell back below $1200 per troy ounce on heavy volume.  Back in Asia, Japan continues to experience mixed economic fundamentals as trade data worsens while inflation surprisingly improved.  The pace of deflation is slowly decreasing, adding to optimism that an inflection point has been reached in consumer prices.  Meanwhile, with the exception of Germany and France, Euro Area manufacturing continued to show improvements, rising to the highest point since January of 2014.



The Week Ahead

Although the week ahead will be filled with economic data following the Thanksgiving void, there are two major geopolitical events on the horizon that could have massive implications for financial markets.  The first event is the OPEC Meeting scheduled for November 30th in Vienna.  While there have been many headlines about an output cap deal within reach, many hurdles remain, especially with key members requesting exemptions and non-OPEC members still unsure about participation.  While crude oil prices have remained elevated on the prospects of a deal being forged, there is a risk that a deal will not be agreed upon.  Besides the OPEC meeting is the lead up to the Italian referendum.  As the first of many European referendums, the results may show that anti-establishment sentiment is building rapidly across Europe.  Besides the political side of financial markets, the US will be reporting the second reading of third quarter GDP before Friday’s nonfarm payroll figure.  Any massive disappointments could see the likelihood of December action on interest rates reduced.  Besides these two major events is a raft of manufacturing PMI data from Germany, China, the UK, and US.  The Euro Area, Germany, and Canada are also each set to report on unemployment figures.


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