Originally published by Rivkin Securities
Overnight the Federal Open Market Committee (FOMC) released the minutes from the December 13th – 14th meeting where it raised borrowing costs by 25 basis points. The minutes showed that members continued to expect “gradual adjustments in the stance of monetary policy” as economic activity expands at a “modest” pace while the labour market would strengthen “somewhat further”. The committee also highlighted uncertainty around the implications of President-elect Donald Trump’s fiscal policies and their effect, although currently near-term risks “appeared roughly balanced”.
Members noted that based on gradual adjustments to the monetary policy stance there was only a “modest” risk of an undershoot in the natural rate of unemployment. The effect of such an undershoot would be a sharp pickup in inflation however the same members also pointed out that inflation continues to run below target only expected to rise gradually, giving the committee time to respond if required.
The hawks on the committee suggested that there was the possibility of having to adjust the path of hikes to less gradual given the tightening in the labour market. Currently the headline unemployment rate for November 2016 was 4.6% with the natural rate of unemployment discussed above estimated to be modestly below 5%. We’ll have further evidence of this on Friday with the release of the December non-farm payroll data.
The market will now focus on Trump’s first 100 days where he sets the tone for his presidency and whether or not he will be able to implement his policies. The FOMC dot plots project three interest rate hikes in 2017 however the market is less optimistic with Fed Fund futures pricing in two hikes.
Following the minutes the U.S. dollar index was -0.41% lower as a result of the euro strengthening +0.58% which gave a much needed break to gold which was +0.33% higher. US treasury yields were unchanged with both the US 2 Year T-Note and US 10 Year T-Note at 1.2340% and 1.24500% respectively. Equity markets were higher, both the S&P 500 and Nasdaq 100 finishing +0.57% & +0.53% higher respectively, with over 80% of S&P500 equities closing up for the session.
In Europe the euro strengthened following a number of PMI reports that signaled a strong finish to 2016 suggested economic growth of +0.4% in the fourth quarter according to Markit who publish the PMI reports. Also boosting the euro was Euro-zone CPI data overnight that surpassed expectations. The headline figure (YoY Dec) rose to 1.1% from 0.6% previous and estimates for only 1.0% mostly as a result of rising energy prices. The core reading which strips away the more volatile items such as a food and energy was higher than anticipated, rising to +0.9% against forecasts to remain stable at +0.8%.
The ECB will be pleased to see progress towards its 2% inflation target and undoubtedly there will begin to be more talk over the coming months as to whether the ECB should continue with its planned extension of the current QE program until the end of 2017. At the moment the Euro-zone story continues to be one of stabilisation rather than robust growth. The current QE program is playing a big part in supporting this and will continue to do so throughout 2017.
Locally the S&P/ASX 200 was flat on Wednesday, up just +0.06% at 5,736.41 and we can expect a stronger start to trading this morning with ASX SPI200 futures up +21 points in overnight trading.
Data releases:
· Japan Nikkei Services & Composite PMI (MoM Dec) 11;30am AEDT
· China Caixin Services & Composite PMI (MoM Dec) 12:45pm AEDT
· U.K. Markit Services & Composite PMI (MoM Dec) 8:30pm AEDT
· U.S. ADP Employment Changes (MoM Dec) 12:15am AEDT
· U.S. ISM Non-manufacturing Composite (MoM Dec) 2:00am AEDT