Originally published by Rivkin Securities
Early this morning local time the Federal Open Market Committee (FOMC) raised interest rates by 0.25% to 1.0% as promised (technically it’s a range from 1.0 - 1.25%). The market fully anticipated the move so it didn’t have a large impact stock or bond prices although stocks did stage a small rally following the announcement such that the Dow Jones Industrial Average closed slightly positive.
Probably the most noteworthy part of the meeting was Chairperson Janet Yellen’s detailed description of the Fed’s plan to reduce its balance sheet. As part of stimulus efforts over the past six years, the Fed had been buying both government bonds and mortgage backed securities in an attempt to keep long term interest rates down. Now that the Fed is again tightening monetary policy it must look to either sell, or let mature, its portfolio of bonds. The Fed’s plan is to start letting the bonds mature without reinvesting the proceeds into new bonds. This will naturally, and gradually, reduce the amount of bonds held by the Fed with hopefully limited impact on markets. With around $4.5t in bonds to unload, the process may have a larger impact than the Fed anticipates although that is something that remains to be seen.
A few hours before the interest rate decision, US CPI and retail sales data were released, both of which were weaker than expected. CPI came in negative at -0.1% although core CPI (excluding food and energy) was up 0.1% but the real weakness came in the retail sales data. Retail sales were down 0.3% where expectations were for a 0.1% increase. The weakness in US retail mirrors the challenges faced in retail here in Australia as many retailers here are struggling to maintain profitability.
Oil had a big move to the downside overnight as the Department of Energy released the weekly inventory information. Although crude inventories declined, marking the 9th decline in the past 10 weeks, the market may have been surprised by the large build in gasoline inventories. As the US enters summer, a time when many people go on driving holidays, gasoline inventories typically decline at this time. The build in gasoline inventories is partly the result of lower demand which isn’t a good sign for the rebalancing of the oil market. WTI oil is currently at $44.70, the lowest price since late last year.
Today Australian employment data will be released by the Australian Bureau of Statistics (ABS). The unemployment rate is expected to stay steady at 5.7% and 9,700 new jobs are expected to have been created.
Data releases:
· Australian Employment Change and Unemployment Rate 11:30pm AEST
. Great Britain Retail Sales (MoM) 6:30pm AEST
. Great Britain Official Interest Rate 9:00pm AEST
. US Philly Fed Manufacturing Index 10:30pm AEST
. US Empire State Manufacturing Index 10:30pm AEST
. US Industrial Production 11:15pm AEST