It’s the week before Christmas but that doesn’t mean it’s going to be a quiet one after stocks in the US ended the week a little on the back foot.
That wasn’t because of the Fed rate hike necessarily. Rather it seemed more likely linked to news of the Chinese navy’s seizure of a US underwater drone. That appeared to remind traders the geopolitical landscape president-elect Trump brings with him is potentially very uncertain and destabilising for markets.
In the end the S&P 500 closed down just one point for the week at 2258. Locally though the ASX 200 fell half a per cent on the week at 5532 but down around 1% from the high of 5595.
But while stock traders’ reaction to the FOMC’s move, statement, and Janet Yellen’s words was fairly benign, forex traders bought the US dollar with gusto. The Australian dollar, along with many other currencies came under heavy selling pressure and ended the week at 0.7303. That’s roughly one and a half cents off the previous week’s close and 225 pips from the week’s high at 0.7525.
Here’s everything you need to know for the penultimate week the amazing year of volatility that has been 2016.
The defining feature of the past week was a recalibration of Fed tightening expectations. The decision by the US Federal Reserve to raise rates by 25 basis points delivered on the 100% certainty traders had expected before the FOMC meeting. But in signalling 3 rate hikes instead of the two the markets had factored in, and by saying they had not factored in the markets expected lift to nominal GDP from Trumponomics the Fed implicitly suggested they may have to hike rates even more.
That’s driven US 2 year bond rates to the highest level since 2009, US 10’s to the highest rates since December 2014. That changed outlook also reinforced to forex traders that the Fed would finally drive the very sort of policy divergence with other central banks traders believe should underpin the US dollar. Against the Euro it’s at its strongest since 2002, it’s surged back toward 120 against the Yen and has continued to pressure the Chinese Yuan driving USDCNY ever closer to 7.0 – a level it hasn’t traded at since the first half of 2008.
Yet stocks appear to have taken the Fed’s move in their stride as traders bet that any fed tightening cycle won’t offset the expected benefits for companies from the tax and spending policies of the Trump administration.
Some worry markets have gone too far too fast since the US presidential election. It’s a reasonable concern. It makes for an interesting end to 2016 and start to 2017.
Australian Calendar – (courtesy NAB Economics, our emphasis)
Monday’s mid-year budgets update (MYEFO) and Tuesday’s RBA Board Minutes are the main events. Markets are also on alert to any news on Australia’s Sovereign credit rating that may follow MYEFO.
MYEFO could trigger a downgrade from S&P of Australia’s AAA rating Federal Treasurer Scott Morrision delivers his mid year economic and fiscal outlook. It’s the government’s update of its finances but what’s important in Monday’s release is the progress towards the government’s goal of returning the budget to surplus.
The NAB’s economics team says:
The economy won’t get the Budget out of jail.
In the absence of legislated budget repair, the “get out of jail” card for Australia might have been the economy doing better than was assumed in the May Budget, thus improving the prospect for tax revenues ahead. The news here is mixed and overall likely neutral from a fiscal perspective.
Which means that “a downgrade by Standard and Poor’s to Australia’s AAA rating remains very likely by mid-2017 and there is perhaps a 50:50 chance it happens next week, after the Mid-Year Economic and Fiscal Outlook” the NAB said.
International Calendar (also courtesy NAB Market Economics)
Global:Fed Chair Janet Yellen speaks Monday on the labour market, a topic that’s germane to the policy outlook. NZ Q3 GDP is on Thursday with upside risk to the consensus. There’s also a bevy of US data, including the PCE deflators Thursday.
US: After Monday’s Yellen speech, a quiet calendar until Existing Home Sales on Wednesday, Chicago Fed National Activity Index, Q3 GDP revision, Durable Goods Orders, Initial Jobless Claims, Personal Income/Spending and PCE deflators and Leading Index reports on Thursday, then New Home Sales and revised December UoM Consumer Sentiment on Friday. The US finalises its presidential elections with the Electoral College meeting Monday – base case Trump will formally become President-elect.
China: A sparse calendar with Property Prices on Monday the main interest.
Japan: Ahead of Tuesday’s BoJ meeting and Monetary Policy Statement is Trade on Monday, then All Industry Activity Index on Wednesday.
Euro: CPI and Trade tonight, then German Ifo Survey on Monday, Current Account on Tuesday, EC Consumer Confidence Wednesday (and for Germany on Friday).
UK: CBI Trends tonight and CBI Retail Tuesday, Rightmove House Prices Monday, Public Borrowing Wednesday, Consumer Confidence Thursday, then later vintage of Q3 GDP on Friday with Current Account, Index of Services and Business Investment.
Canada: Retail Sales and CPI on Thursday (together with new Stats Canada core CPI) the main calendar drawcard. Monthly GDP comes on Friday.
NZ: Thursday’s GDP the main event with our NZ colleagues looking for 0.9% q/q and 3.7% y/y with upside risk. Also due are Consumer Confidence, PSI Services, Building Permits, and ANZ’s Business Confidence Monday, Food Prices Tuesday, Net Migration, Trade, and Credit Card Spending Wednesday, BoP and Credit Thursday.
And here is the NAB’s excellent calendar of all the key data and events for the week ahead.