“The market” is betting that there is a 100% chance of a 0.25% base interest rate rise being announced tomorrow by the FOMC (Federal Open Market Committee), at the start of its two day conference.
Thereafter, market makers, movers, investors and traders will be looking for what’s termed “forward guidance” clues, in Janet Yellen’s post decision press conference, as to whether (or not) any rise will be part of a programme towards rates ‘normalising’ in 2017.
The facts are clear, the USA economy is surely robust enough to withstand a small rise? USA unemployment is low, the DJIA and SPX keep taking out record highs and the president elect is committing to reshore many jobs back to the USA and indulge in a historical fiscal stimulus, to rebuild crumbling infrastructure and create mass employment opportunities. Mrs Yellen and the FOMC members have the perfect alignment of factors to push rates up for the first time in 2016.
In Europe Greece was back on the agenda as the Greek finance minister Euclid Tsakalotos, took exception with the IMF, who he accuses of demanding more austerity measures. This disagreement comes as IMF monitors arrive in Athens to consider what improvements have been made. The IMF allegedly stated that Greece’s bailout plan is not credible. The IMF warned that demands by Greece’s creditors for a sustained 3.5pc primary surplus, which excludes debt servicing costs, were unrealistic and unnecessary.
The IMF had previously suggested that a primary surplus target of 1.5pc of GDP is more realistic. It also called for debt relief, beyond the action taken this month to reduce Greece’s debt share by 20 percentage points. This spat comes at a time when Greece needs to secure its third tranche of €85 billion bailout funding. The IMF’s position appears to be clear and concise; the current debt levels are still unsustainable and no amount of structural reforms or austerity will fix that insoluble situation. Only debt relief, in the order of the 20% figure mentioned, can possibly restore some order to Greece’s (still) precarious situation.
Italy’s banking crisis appears to be under control, for now. Unicredit, Italy’s largest bank, saw its share price rise by 16%, as a restructuring programme was announced, involving a circa €13bn bail in by: investors, bond holders and share-holders. The programme comes at some cost, in a country still suffering from devastating unemployment; a minimum of 16,000 job losses by the end of 2019. Banca Monte dei Paschi di Siena SpA climbed after a European Union official stated the lender may be eligible for a precautionary recapitalisation, if the private sector bail in fails to materialise.
European markets rallied during Tuesday’s trading sessions, with the exception of Athens’ main market. The UK’s inflation figure came in slightly higher than anticipated at 1.2%. However, despite being up from 0.9%, the figure is still short of the BoE’s target of 2%, pencilled in for steady and sustainable growth. Predictions vary as to where the UK’s inflation will be by the 4th quarter 2017, a figure between 2.5% and 3.8% is the general consensus. If at the top end of expectations, should UK wages stay mired at around 2% year on year increases, the UK’s consumers and household budgets could become stretched.
The FTSE 100 finished 78.15 points, or 1.13% higher at 6968.57, the highest close witnessed since the end of October. Germany’s Dax closed up 0.84%, at 11,284.65. France’s CAC rose by 0.91%, to 4803.87. Italy’s FTSE MIB finished 2.49% higher at 18,827.61, with Unicredit up nearly 16%. Spain’s Ibex ended the day 1.58% better at 9331.3. In Greece, as the bailout issue resurfaced, the Athens market dipped by 0.1% to 639.71.
The S&P 500 rose to an all time high of 2,271.63 in New York, closing the day up 0.65% The Dow climbed by 114 points to 19,911, another record close. The Nasdaq 100 Index rose by 0.95% to its first record reached since October.
The yen weakened by 0.3 percent to circa 115.33 per dollar, following Monday’s 0.3 percent climb. The euro fell by approx. 0.1 percent to $1.0620. Sterling gained versus its major and minor peers as a consequence of the UK’s inflation reaching 1.2%, the highest level seen in more than two years.
WTI (West Texas Intermediate) rose to a seventeen month high, by adding 0.3 percent to close out at $52.98. WTI has now risen by circa seventeen percent since OPEC agreed on Nov. 30th to cut output for the first time in eight years. Brent for February settlement rose by 3 cents to $55.72 a barrel, also the highest level seen since July 2015. Gold traded near a ten month low as investors rotated out of precious metals’ safety, in anticipation of the first U.S. base rate increase by the Fed in a year.
Economic calendar events that could effect market sentiment on Wednesday December 14th
09:30. GBP, ILO Unemployment Rate. 4.8%, 4.8%. The UK’s unemployment rate, at 4.8%, is predicted to remain static when the data is published at 9.30 London time. Naturally, any deviation from this prediction could cause sterling to react.
10:00, EUR, Euro-Zone Industrial Production 0.8%, 1.2%, the Eurozone’s yearly production estimate is predicted to show a contraction to 0.8%, any change from this anticipated figure could effect the euro.
13:30, USD, Advance Retail Sales 0.3%, 0.8%. The consensus, from analysts polled, is that advanced retail sales will have experienced a contraction in November. However, this data is unlikely to influence any FOMC members’ decision making.
14:15. USD, Industrial Production -0.4%, 0.0%. Similarly, although a regression is predicted, this data is also unlikely to sway FOMC members in relation to their base rate decision making.
19:00. USD, Federal Open Market Committee Rate Decision, 0.75%, 0.50%. The market is pricing in a 100% chance of a 0.25% rise. However, traders should (as always) prepare for a shock. In light of the January presidential inauguration, the FOMC might prefer to delay, they could also shock with a 0.5% rise.
19:00. USD, Fed Summary of Economic Projections. The after math of the base rate decision/s, the rationale behind the FOMC thinking, is as eagerly anticipated as the rate decision. The value of the USA main indices, together with the value of the greenback, could rise and fall in dramatic fashion, depending on the commentary from Mrs. Yellen, the chair of the Fed.