More hawkish than dovish, December could bring more than mince pies

The Federal Reserve maintained interest rates at the current level of 25basis points on Wednesday, but appear to remain focused on the idea of raising them before the year-end. This is despite the recent economic data coming in softer than expectations. The Federal Open Market Committee dropped a reference to global risks in their statement. Yields on the two-year treasury jumped 7 bases to yield 70 basis points.

 

On Thursday the US released its latest GDP estimates for the third quarter, rather in keeping with recent data, the number came in below expectations as the economy grew in the third quarter at 1.5%.

 

Understandably the Federal Reserve appears keen to move away from zero rates.  For no other reason than this would almost be a vindication of all the stimulus measures they have introduced over the past few years.

 

Commentators seem to expect the first move to be 25bp when it comes. There is no reason why it could not be less than that, and 10 basis points could well be a way of testing the water.

 

Equity markets on Thursday took the combination of the news that US GDP was weaker than expected for the third quarter, along with the more hawkish than expected statement in their stride, the Vix hardly moved.  The US dollar rallied putting pressure on the resource sector, this led to the Ftse 100 underperforming other developed markets. Today’s market reaction may suggest that investors have been encouraged by the Fed’s belief that the underlying economy is strong enough to withstand a modest rise, or they still believe the Fed will wait until mid 2016. Either way this muted reaction can only encourage the Federal Reserve to move in December.

 

The Fed’s next and last meeting is on December the 15th and 16th, the ECB’s final meeting of the year is on the 3rd of December. When the Fed comes to make their decision they will know what further measures if any the ECB have decided to take and the impact on the US dollar.

 

On another note the Chinese government announced today that the one child policy in place for over 30 years has been doubled to allow married couples to have two children. The policy was introduced to control an exploding population that put pressures on the countries food and water supplies. The policy appears to now result in strains on an aging male work force. The effects of this decision may well take time to come through to the wider economy, in the mean time those companies selling baby products in the region may benefit. 

Posted on October 30, 2015 .