Is Santa Coming Twice? – Dec 18th 2016

LAST WEEK

Last week was not all about the Fed rate hike on Wednesday,. It was all about the dot plot. To some it may have been a surprise that a widely expected 0.25% increase in the US was apparently not fully priced in. But it was the Fed’s revision for interest rates in 2017 that moved markets.

Without news, Monday saw a slight USD fade against most major currencies, and a similar fade in all indices except DAX, which rose all week. After last week’s upswing, oil started a fade which lasted all week.

Tuesday saw all indices rise but pre-FOMC divergence started. The SPX rose particularly sharply, the NKY, DAX and FTSE more gently. All currencies had a flat day, except for GBP which had a slight blip (faded same day) after the UK CPI beat at 0930.

The US Retail Sales miss at 1330GMT on Wednesday was shrugged off, SPX actually rose, as all eyes were on the Fed rate decision at 1900GMT.

As expected the FOMC announced it would increase the federal funds target rate from 0.5% to 0.75%. Despite the move being widely expected, USD immediately ramped and gold fell hard. The reason was that the Fed announced it anticipated raising rates 0.25% three further times in 2017. With a strengthening labor market nearing full employment and inflation moving more rapidly toward targeted levels, this proposed further tightening of monetary policy was over and above a declared wait-and-see approach towards President Trump’s expansionist agenda. A far more aggressive stance than expected and than we have seen previously. But one that suggest the Fed is more than aware of the risks the Trump agenda carries even if they would not openly admit it.

Most markets move in synch with higher rates and a higher dollar except for oil which remained unmoved (despite the EIA beat earlier in the day). Indices rose initially and then sold off, the first negative stock reaction to a Janet Yellen Press conference since March 2014. The exception was the NKY which moved in tandem with a rampant USDJPY.

Thursday’s European session saw DAX and FTSE rise, possibly in reaction to the falls in EUR and GBP caused by the Fed decision. The US session saw SPX recover a lot of the ground lost the previous day. USD continued to rise against other currencies,

Friday saw the USD rally pause, except against AUD and NZD which continued to fall, the latter touching a six-month low. However, only GBP showed any real recovery, although EUR rose slightly, possibly assisted by the 1000GMT CPI figure. Unlike DAX, SPX started to fade, whilst FTSE held steady.

NEXT WEEK

Monday’s Asian session has the BoJ interest rate decision at 0300. No change from -0.1% expected, but the accompanying policy statement may affect the yen, weakened by over 12% since the last one.

Tuesday 0030 sees RBA Minutes (but not a rate decision), and Wednesday sees the weekly WTI EIA report at 1530.

A whole raft of US data comes out Thursday 1330. Personal Consumption, Personal Income, and Jobless Claims are not as important as Durable Goods orders and GDP. The latter is an indicator for future rate hikes, so watch USD.

GDP is also reported for the UK on Friday morning at 0930.