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World Week Ahead: Fed rate hike pace

Monday 13th March 2017

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Investors will closely watch the US Federal Reserve, which is expected to announce a decision to raise its key interest rate on Wednesday, for any clues about the pace of further rate hikes this year. 

A Dutch general election on Wednesday will also be scrutinised. Recent polls showed that anti-Islam and anti-European Union candidate Geert Wilders has lost ground against Prime Minister Mark Rutte, but the latter warned of a surprise result in the vein of the UK’s decision to leave the EU and Donald Trump’s victory in the US presidential elections last year.

“I fear Brexit. When I went to sleep all predictions were it would not happen and at 6am the next morning Brexit happened,” Rutte told news programme Nieuwsuur Friday, Bloomberg reported. “And the same with Trump: CNN still said Hillary Clinton would be the next US president. I warn of that.”

Over the weekend an escalating diplomatic row between the Netherlands and Turkey prompted protests by backers of Turkish President Recep Tayyip Erdogan in Rotterdam, which were quelled by Dutch riot police. Some say this might help sway additional votes towards Wilders. 

In the US last Friday a report showed employers added 235,000 jobs in February, comfortably exceeding expectations. Even before Friday’s data Fed chair Janet Yellen — and many of her colleagues — flagged the central bank would hike rates at its two-day policy meeting ending on March 15.

"The report seals the deal for a rate hike [this] week,” Gus Faucher, deputy chief economist at PNC Financial in Pittsburgh, told Reuters. “The labour market is where the Fed wants it to be.”

Last week, the Dow Jones Industrial Average fell 0.5 percent, the Standard & Poor’s 500 Index declined 0.4 percent, and the Nasdaq Composite Index slid 0.2 percent. Even so, Wall Street remains close to record highs set earlier in the month. 

"In the short term we're a little bit cautious [in stocks] because valuations are stretched," Sameer Samana, global quantitative and technical strategist at Wells Fargo Investment Institute in St Louis, told Reuters. “But as long as the economic data keeps improving and without inflation being an issue, any weakness becomes an opportunity to add” to equity longs.

The latest data on the US economy will arrive in the form of reports on the labour market conditions index, due today; the NFIB small business optimism index, and the producer price index, due Tuesday; consumer price index, retail sales, Empire State manufacturing survey, business inventories, and the housing market index, due Wednesday; housing starts, weekly jobless claims, Philadelphia Fed business outlook survey, and JOLTS, due Thursday; as well as industrial production, Atlanta Fed business inflation expectations, consumer sentiment and leading indicators, due Friday.

In Europe, the Stoxx 600 Index inched higher on Friday, lowering its decline for the week to 0.6 percent.

Meanwhile, a slump in oil prices might continue to weigh on sentiment.

“The most substantial fly in the ointment is the break-down in crude this market is experiencing,” Yousef Abbasi, global market strategist at Jonestrading Institutional Services in New York, said in a note to clients, Bloomberg reported. “For most of this year, we’ve managed to ignore rising inventories for crude and refined products while speculators were record long.”

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