Originally published by Rivkin Securities
Last night the Federal Reserve’s open market committee met to decide interest rates. As widely expected, it raised rates by 25 basis points to a range of 1.75-2.0%. Overall, the statement was also consistent with expectations with the Fed indicating a likelihood of two further interest rate hikes this year. The effect on financial markets was fairly muted due to the lack of surprises in the announcement. Nevertheless, stocks did sell off in the last hour of trading following the announcement. After tracking close to flat for most of the day, the S&P 500 closed down 0.4% while the Dow was down almost 0.5%. ASX 200 futures are down 5 points this morning.
Gold prices dropped around $5 per ounce as the announcement was made but quickly rebounded and closed slightly higher on the day. Higher interest rates are normally a negative for gold (which earns no interest) although the market is very forward looking and may be focussing on the fact that the pace of rate hikes is set to slow considerably after this year. The Australian dollar also rapidly reversed direction after an initial drop after the announcement. The Aussie dollar traded as low as US$0.753 but rebounded to US$0.757.
Today Australia’s employment data will be released with 18,800 new jobs expected to have been created, slightly down on the prior month’s 22,600 but still a strong number if realised. The unemployment rate is expected to notch down to 5.5% from 5.6%. Later tonight, the US releases its retail sales data for the month of May which is expected to show a solid increase of 0.5%.
US bond yields have been recovering from low levels reached in late May and the 10-year yield is now back near 3.0%, currently at 2.97%. Short-term yields have been rising faster than long-term yields which is causing a flattening of the yield curve. This may signal that the market is concerned about longer term economic growth while it expects further interest rate hikes. Australian bond yields are now firmly below US yields which is a rare situation relative to historical norms.
Data Releases:
- Australia Employment Data 11:30am AEST
- China Industrial Production 12:00pm AEST
- UK Retail Sales 6:30pm AEST
- US Retail Sales 10:30pm AEST