World Week Ahead: Fed set to move

Monday 12th December 2016

With Wall Street at record highs, investors are keenly awaiting the US Federal Reserve’s view on the outlook for interest rates next year.

The Federal Open Market Committee, which begins its two-day policy meeting on Tuesday, is widely expected to announce a rate hike on Wednesday. It last lifted its key target rate a year ago.

“The market is going to try to key off of whether we are going to fall into the one-to-two [hikes], or the three-to-four for 2017," Jason Ware, chief investment officer at Albion Financial Group in Salt Lake City, told Reuters.

Fed chair Janet Yellen will hold a press conference at the end of the meeting, while the Fed will also release its quarterly economic projections and fed funds rate outlook on Wednesday.

"If in the statement and the discussion afterwards it appears that the Fed is getting more concerned that they are behind the curve and they have to tighten more aggressively than the market currently expects, that could knock stocks back,” Ware noted.

Earlier this month, a Labour Department report showed that US nonfarm payrolls rose by a better-than-expected 178,000 jobs in November, while the unemployment rate unexpectedly fell to 4.6 percent, a nine-year low.

US equity markets have rallied amid bets President-elect Donald Trump will up spending and loosen government regulation. Last week, stocks that previously were not seen as benefiting from a Trump presidency such as tech companies rebounded as bullish sentiment broadened.

“The tone of the Fed is going to be key to the sustainability of this rally,” Tim Ghriskey, chief investment officer of Solaris Asset Management in New York, told Reuters.

For the week, the Dow Jones Industrial Average rallied 3.1 percent, as did the Standard & Poor’s 500 Index, while the Nasdaq Composite Index climbed 3.6 percent.

“You have this post-election exuberance that has been infecting every area of the market," Peter Costa, president of trading firm Empire Executions, told Reuters. “There was a rotation out of tech stocks early on because the industrials were in favour. Now the tech stocks are getting some legs under them as well.”

The latest US economic indicators slated for release this week include reports on the NFIB small business optimism index, and import and export prices, due Tuesday; producer price index, retail sales, industrial production and business inventories, due Wednesday; consumer price index, weekly jobless claims, Philadelphia Fed business outlook survey, and Empire State manufacturing survey, due Thursday; as well as housing starts and Atlanta Fed business expectations, due Friday.

As stocks have rallied, US Treasuries have slumped. Last Friday the yield on the benchmark 10-year note rose six basis points to 2.47 percent in New York.

And there’s more weakness ahead, some predict.

“Although the prospect of a Trump stimulus has already caused a big sell-off in the US Treasury market, we still expect the 10-year yield to climb in 2017 and 2018 as the Fed raises rates by more than is generally anticipated,” according to Capital Economics. It predicts the 10-year yield to rise to 3.0 percent in 2017 and to 3.25 percent in 2018.

In Europe, the Stoxx 600 Index rose 1 percent on Friday, a day after the European Central Bank announced an extension of its asset purchase program until the end of 2017 and offered a commitment to expanding it if needed, even as it plans a tapering of the amount it buys every month as of April.

While euro-zone equities rose last week, the euro slumped.

Bank of England policy makers are set to gather this Thursday.

BusinessDesk.co.nz

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