Thursday, December 15, 2016

FED: hawkish vision for 2017, Funds Rate in 0.75%

FED decision with hawkish tone.

After the meeting of the FOMC we know their decisions, and the truth surprised the tone much more hawkish than what the analysts expected, although I think it was necessary to do the Rate Hike, and better, gradually. Now control inflation and not so much employment will become the guide of the Fed in the next two years. In summary:

- The Rate Hike was given in the 0.25% expected, bringing the rate range to 0.50-0.75%.

- There will be at least 3 increases during 2017 (the rate can reach 1.5% by the end of that year), depending on the inflation and growth range with the Trumponomics.

- The FED sees growth and therefore in the long term estimate the interest rate will rise to 3% compared to the projected 2.9% previously. Likewise, core inflation fixes it at 1.7% at the end of this year.

If inflation rises threatening the target of 2%, the FED should accelerate its measures to cool the economy somewhat. And this is likely to happen with unemployment under 4.6%, salaries growing at 4% YoY, plus 4% growth plus tax reduction promised by Trump, undoubtedly domestic consumption will increase and with it inflation. Undoubtedly, we have to spin fine in the US to maintain financial stability.

Winner and losers

The big winner, without a doubt, the US Dollar /DX strengthened and with tremendous increases (+1.37% today) against all currencies, in the case of EUR/USD at level 1.04, minimum at 14 years, and with projection to finish 1/1 at the end of the year as you forecast a few weeks ago. With the pair USD/JPY comes in 118, heading to 120. And with the dollar, the whole banking sector also won.

 The big losers: minerals such as gold /GC and silver /SI, generally inversed to the dollar, with falls of the order of 3.5 and 7% respectively. The crude oil /CL also fell 3% although there I see other additional factors, such as doubts that comply with OPEC agreements, something already common among oil countries.

Gold is falling from Trump, obvious by the strength of the dollar. Technically in oversold field for weeks, should correct slightly soon despite there are no close supports.

Other big losers were the american Treasury Bonds, in their different maturations. I previously commented on its relevance, and today it takes more interest with these increases of types that come. With yesterday's sell off, its referential index, the yield of 10-year notes TNX reached 2.58% today and with all the strength necessary to reach 3% soon. Note that mortgages use this rate as a reference, therefore they will rise: it is convenient to monitor the mortgage sector, index $DJUSHB. Another fact that shows the strength of this yield: against the Bund (10-year German bond) the spread between both has reached a level that was not seen since the years of the Berlin Wall.

Some charts about FED decision

The Deutsche Bank DB presents its short-term vision of the different economic instruments in the US, in the table below. We already know the response of the FOMC, hawkish. We will see if your forecast is met and the Dow Jones $DJI reaches 20,000 points before the end of the year or if the market reacts as it usually does lately: go against any forecast or analysis.

The Recommended Reading

Another instrument of fixed income affected by the measures of the FED are the Treasury Bills, the safest and short-lived and, therefore, the most affected by changes in the i-rate. This article of the blog Jesse's Cafe Americain, is quite didactic explaining the index IRX that handles Wall Street to follow the T-Bills: its characteristics, behavior and weaknesses, with illustrative graphs comparing it with the other indices. I recommend your reading and careful analysis.

Wall Street is in "Extreme Greed"! mode, according to this CNNMoney indicator.