Decision day arrived for the FOMC and the most widely predicted and communicated rate rise in years was finally announced; the rate is now 0.75%. The accompanying narrative indicated that Janet Yellen, chair of the Fed, believes the USA economy is robust enough to survive three interest rate rises in 2017. In her post announcement press conference she referenced: a strong labour market, inflation edging up and several economic indicators, suggesting the economy was indeed in a good place to withstand this initial and future 2017 rate rises.
The markets appeared to back up her assertions and reacted with classic “risk on risk off” characteristics. The main USA equity indices losing some of the ground made since the presidential election result on November 9th and the dollar rising versus many of its peers. The dollar crashed through R3 versus Yen, to breach 117.00 for the first time since late January, and cable slumping through S2, as did EUR/USD.
A cautionary and defensive tone in her conference, arrived in the form of a reply concerning the inequality of the supposed economic recovery. She was questioned that; “people are angry about the economy, even though the aggregate performance levels seem pretty good. So would you be reevaluating how you see the economy?”
Mrs Yellen replied she has long been worried about income inequality, wealth inequality, and the fact that many families haven’t seen real wage gains. “These are long-standing concerns. These are not new phenomenons, but the recession was very severe and probably exacerbated them.”
Mrs. Yellen did however ensure that the various assembled journalists obtained some gossip to fill their columns with, by suggesting that the incoming president should not think of reversing the Dodd-Frank measures put in place after the 2008 banking crises. Moreover, she appeared entirely relaxed over her tenure, indicating that she intends to fulfil the rest of her term and mandate until 2018.
“Our decision to raise rates should certainly be understood as a reflection of the confidence we have in the progress the economy has made and our judgment that that progress will continue. It is a vote of confidence in the economy.”
“I would say it’s very important not to roll back. There maybe some changes that could be made and we’ve suggested a few, like eliminating the burden of compliance with the Volcker rule or incentive compensation regulations for smaller banks or modestly raising the threshold for banks that are subject to enhanced credential supervision. But I would urge that it’s important to keep this in place.”
Earlier on Wednesday there was data released concerning the USA economy that may have caused the FOMC to blink; mortgage applications dropped by 4%, versus an expectation of no change and advanced retail sales dropped by -0.1%, with the expectation of a 0.3% rise. Major news events in Europe concerned the continuing rescue attempts at Italian banks and the UK’s unemployment rate, remaining static at 4.8%.
The DJIA closed down 0.60% losing 118 points on the day, at one point reaching an intra day record high of 19,966.43. The SPX closed down 0.81%, with the sub-gauges of energy producers and utilities down by over 2 percent. The MSCI Emerging Markets Index slipped 0.5 percent. Small-cap stocks were hit hard in the U.S., the Russell 2000 Index closing down by 1.3 percent. Asian index futures were mixed after the Fed’s statement, with contracts on equity markets in Australia and South Korea signalling losses on open, whilst shares in Japan and Hong Kong were looking bullish.
In European main equity markets there were no gainers; the FTSE 100 closed down 0.28%, the DAX down 0.35%, CAC down 0.72%, Italy’s MIB closed down 1.18%.
The Dollar Spot Index, measuring the greenback versus its ten major peers, jumped by 1.1 percent, to reach its highest close on record. The yen lost 1.6 percent to 117.04 per dollar as the euro fell 0.9 percent. The dollar rose versus most of its peers; cable fell through S2 to end the day at 1.25358, the Swissie and Loonie both came under pressure as USD/CHF breached R2, finishing the day at 1.02191, with USD/CAD reaching 1.32869 at the end of the trading day.
WTI (West Texas Intermediate crude) immediately slumped by 3.7 percent after the FOMC announcement, arresting the four day rally seen since the OPEC/non OPEC members’ agreement reached last weekend, to settle at $51.04 a barrel. Gold (for immediate delivery) fell by 1.4 percent to $1,142.95 an ounce, the lowest level witnessed since February. The Bloomberg Commodity Index dropped by 0.3 percent as futures on: sugar, cotton and soybeans fell by circa 0.4 percent.
Economic calendar events that may effect market sentiment on Thursday December 15th
08:30. EUR, Markit/BME Germany Manufacturing PMI 54.5, 54.3. Markit Economics publish a raft of PMIs on Thursday. As the powerhouse manufacturing economy of the Eurozone Germany’s data is always keenly watched for indications as to the overall health of the region.
08:30. EUR, Markit Germany Services PMI 54.9, 55.1. Services PMI for Germany is anticipated to come in slightly below the October figure.
08:30. EUR, Markit/BME Germany Composite PMI 54.9, 55.0. The overall composite PMI for Germany, in effect an aggregate for many of the PMIs published, is expected to slip moderately.
12:00. GBP, Bank of England Rate Decision 0.25% 0.25%. It’s not anticipated that the UK’s BoE will announce a raise of interest rates at this meeting. The indications, from governor Mark Carney, is there’s still an observation period in place regarding the UK’s referendum decision.
12:00. GBP, BOE Asset Purchase Target 435b 435b. The BoE is not expected to increase the quantitative easing programme, beyond what’s currently in place.
13:30. USD, Consumer Price Index (YoY) 1.7% 1.6%. The consumer prices index of the USA is expected to have ticked up slightly, to reach 1.7% annualised.
13:30. USD, Initial Jobless Claims 255k 258k. Initial jobless claims in the USA are expected to reveal a fairly consistent figure of 255k weekly claims.