The Fed might have just scored a central banking own-goal only rivaled by the Bank of Japan’s foot-shooting episode in January this year when it took rates into negative territory. I have plenty of commentary below but essentially the Fed hiked as expected but then accidentally got uber-hawkish on rates.
So markets have seen some big moves. Stocks have fallen, rates are on the rise, the US dollar is on the march and commodities are under pressure. That could make for an uncomfortable day for traders in Australia and across Asia today. The Aussie dollar has already plunged a bit.
Here’s the scoreboard (7.46am AEDT):
- Dow: 19833 -76 (-0.4%)
- S&P 500: 2252 -17 (-0.8%%)
- SPI 200 Futures (December): 5,565 -17 (-0.3%)
- AUDUSD: 0.7409 0.0090 (-1.1%)
The top stories
1. Here’s what the Fed did
- It raised rates by 25 basis points as expected.
- The dot plot says 3 hikes, not the 2 the market expected for 2017.
- The Fed slightly upgraded its growth and inflation forecasts.
- Here’s a wrap of what Janet Yellen had to say at her press conference.
And if I can editorialise, it did all that based on the current economy and expectations about how that will evolve before any addition of Trumponomics stimulus. Rates could actually head quite a bit higher in 2017 if stocks are right.
2. And here is what the markets did after the Fed decision, and Janet Yellen’s press conference. Markets have had some sharp moves in the aftermath of the FOMC decision and Janet Yellen’s presser. The Fed has rocked the complacency traders felt by dancing around the impact of Donald Trump’s policies and in doing so implicitly suggesting rates could rise much further than the average dot plot suggests.
Here’s a quick run around the grounds of where things are now and where they were a few minutes before the announcement at 6am AEDT. I’ve put where they were in brackets.
- S&P 500 2253 (2271)
- US dollar Index 102.02 (100.98)
- US 10 year Treasury 2.5486% (2.4495%)
- Euro 1.0534 (1.0639)
- USDJPY 117.02 (115.39)
- AUDUSD 0.7409 (0.7499)
- Gold $1143 ($1161)
- WTI Crude Oil $50.91 ($51.75)
These are big, big moves folks. Australian and Asian trade will be materially impacted by this today.
3. Slide 7 from Jeff Gundlach’s epic end of year presentation shows why Trump’s infrastructure spend should get solid support on Capitol Hill. So my focus is on the fact that the Fed’s decision is, correctly, based on current and prospective economic settings. That is before any stimulatory impact from the tax and infrastructure policies of the new administration.
With that in mind, Slide 7 of Gundlach’s presentation shows the collapse in real public construction and he said this “indicates that we’re way, way behind on our infrastructure bill”.
4. And it all ties together to show why money managers all agree the US dollar trade is really crowded, but they’re loading up on it anyway. Akin Oyedele says that the latest BAML survey of big global investors found that investors think “long US dollar” is the most crowded trade right now.
But bets on a higher dollar are being driven, in part, by the expectation for higher interest rates in the US. We got confirmation of that this morning. The crowd just got a little bit bigger, it seems.
5. I wouldn’t normally put this in but it does give context around US interest rates. Elena Holodny has a great piece where the 5,000-year history of interest rates shows just how historically low US rates are right now.
Now it’s worth noting that where rates were 30 years ago probably has less significance on the current market and economy given technological and demographic changes, and 5000 years of history is almost irrelevant.
Except for one thing. An economy nearing full employment, with inflation starting to rise, and without Donald Trump’s reflationary policies factored into Fed projections just screams rates are too low. Elena has more here.
6. This hedge fund manager says there is crucial information about the market most investors are missing. More on that interesting hedge fund being set up by Manoj Narang. Rachael Lecy reports this morning that Narang says he can find crucial information in the options market about what investors are doing and how they are thinking about risk.
He’s talking about the price for any moves in volatility – implied – and he’s right. Rachael has more here.
From Ric Spooner at CMC Markets, here’s today’s Stock to Watch
This company is the leading outdoor advertising company in Australia and New Zealand (Billboards and all the advertising you see on public transport and in airports).
Yesterday it announced a merger with rival oOh!media. This will be pretty much a merger of equals with APN shareholders owning 55% and oOh!media shareholders 45%. The new entity will have around 9000 digital billboards and 63,000 classic screens and panels.
However, the good news for shareholders is the cost savings. Management is forecasting $20m in savings by merging the entities in a move that will improve Earnings Per Share for both sets of shareholders by 14-15%.
The merger was positively received. APO’s share price rose 9.2% yesterday while oOh!media was up 10%
Ric Spooner is chief market analyst at CMC Markets. You can follow Ric on Twitter: @ricspooner_CMC