FOMC Rate Hike Aftermath

The week has been monopolized by the FOMC announcement of the interest rates, and the following statement and Q&A by the Fed Chair Ms Janet Yellen. As expected the interest rates where risen by 25bps. The reason of such expectation where quite evident:

Ms Yellen has been pretty clear about her opinion regarding what should be done. Since q4 2016 she made clear that the time of “0 like” interest rate was reaching an end, unless unexpected shocks would have impacted the US and Global economy. A higher hike was unlikely, even if it could not be excluded.

While the labour market is showing sign of continuous strength and the inflation is raising and getting closer to the 2% target, the economy is still vulnerable to internal threats, mainly due to the uncertainty regarding how the reforms announced by President Trump will actually be implemented.

The financial markets rally in the US has been fuelled mainly by the expectations on these announcement, and an aggressive rate hike of 0.50% could have sparkled some heavy rethinking on the sustainability of the rally.

More, there are a few important global issues that might impact on the US economy, mainly related to the situation in Europe and the upcoming political consultations in Holland (partially eased) and France.

The FED has been very wise in gradually announcing their change of policy on interest rates, thus “preparing” the market for the coming rises.

There is evidently a conflict between the FED and the newly elected President of the United States, but the FED has remarked its independency from Washington, and will follow its goals to reach the target inflation, sustain the labour market and prevent the economy from overheating.

Would the interest rates not been risen, we could have witnessed a even more positive impact on the stock markets in the US, immediately heading to new highs.

Apart from the entity of the interest rate hike, what is more important, in order to try depicting future market moves, is the content of the statement and of Yellen’s answers during the Q&A.

We can detect a confirmation: caution in raising interest rates, notwithstanding the wording chosen by FOMC in its statement, seems to be permanently over. The future attitude of the FOMC is clear and it has been widely anticipated by the FED chair MS Yellen. We could end the year with Fed rates at 1.5%

Ms. Yellen remarked quite a few times that the date from the labour market and families’ spending are consistently good, and the inflation is approaching the 2% target.

The FED believes the economy is on the right track in the US and threats in Global economy are seen as losing power, signalling a positive trend for this year and the next one.

In such a scenario of optimistic economic outlook, the S&P 500 rose and the USD slumped against almost all currency. As we can see today, it was a short-term reaction on the S&P500, which is again showing signs of uncertainty:

Good news for Oil: Strong economy equals strong demand for energy, and yesterday Brent and WTI reacted positively confirming this view. Both Brent and WTI reacted positively. Gold: on the rise, contradicting both the inverse correlation with stock markets and the bullish view on the economy. Interesting enough, interest rate hikes seems to have fuelled a recovery:

Watch out next week on these two commodities.

Roberto d’Ambrosio

CEO Alpari Research & Analysis