This article was written by Craig Anzlovar, Vice President, Fixed Income Client Portfolio Manager.
Capital markets shrugged off the tragic events in Paris and ended firmer week over week (w/w). Equity markets were higher with the S&P 500 Index returning 1.73%. The Paris CAC 40 Index was also higher at 1.05%. Markets were focused on the Federal Reserve’s (Fed) October meeting minutes on Wednesday. According to the minutes, the central bank believes “it may well be appropriate” to raise rates in December. Also, it was largely agreed that the pace of increases would be gradual. The Fed Funds Futures market is pricing in a 68% chance of a December rate hike. That figure is up from 66% last week and well above the 25% low reached in October. The U.S. Treasury curve bull flattened* during the week with the 5-, 10- and 30-year yields down 5 basis points (bps), 8 bps and 10 bps, respectively. The prospect of Fed tightening supported the U.S. dollar (USD) with the Bloomberg Dollar Spot Index up 0.55% for the week. The Index is up 9.25% year to date.
1.ECB – Preparing the Ground
In July 2012, with the Euro sovereign debt crisis at its peak, ECB President Mario Draghi promised to do “whatever it takes” to ensure the continued survival of the Euro. It had an immediate effect, especially when Mr Draghi was questioned as to the actions the ECB could take, and he replied, “believe me, it will be enough”. There were shades of that speech last week as Mr Draghi spoke in Frankfurt and emphasised the Central Bank’s commitment to do “what we must to raise inflation as quickly as possible” towards the ECB’s target of close to, but below 2%. This call to action was backed up by other sources as well. The minutes of the ECB’s October meeting made it clear that the Governing Council was dissatisfied about how monetary policy had so far not been able to push inflation higher, and noted that the “degree of monetary policy accommodation would need to be re-examined in December”. In addition, the ECB’s Chief Economist Peter Praet expressed concerns on “the risks of inflation expectations becoming disanchored and on ECB credibility” as the return of inflation towards the 2% target remains uncertain even in 2017. At this stage, a cut of 10bps in the ECB’s depo rate and a monthly increase of €10bn in asset purchases are probably priced into markets. It remains to be seen if the ECB surprise the markets and acts more aggressively.
The prospect for a December Federal Reserve (Fed) rate hike continues to reverberate through financial markets. During the last week, the Fed’s rate hike bugle call was joined by the uber doves on the board, Fed Governors Rosengren and Evans. Both Governors made more hawkish-than-expected comments, including that the December meeting was a “live” one. In the last two weeks, the U.S. dollar (USD) and fixed income markets essentially priced in a December rate hike, while commodity prices and equity prices did not. But that changed last week. As a result, the market probability for a December rate hike has increased from 56% last week to 66% as of November 12 (see chart).
1. ECB – When Doves Talk
It appears likely that the U.S. Federal reserve will increase the Fed Funds rate for the first time in almost a decade at their forthcoming December meeting. This has led to speculation that the ECB might feel less pressure to change their monetary policy stance at their meeting in early December. However, two events last week appeared to dampen that speculation. Continue reading
Posted in Fixed Income, Markets, Uncategorized
Tagged ECB, economy, Europe, European markets, Eurozone, Fed, Fed policy, Fixed Income, Interest rates, monetary policy, QE, QE Tapering, rising interest rates, the Fed, U.S. Economy, US dollar, US GDP, USD
When the Federal Reserve (Fed) changed to a hawkish tone in their October Federal Open Market Committee (FOMC) statement, we believe their intent was to shock financial markets out of their complacency about the Fed being on hold for the rest of the year. During the past week, key Fed officials, such as Fed Chair Yellen and Governors Dudley and Fischer, tried to drive that point home by clearly stating the December meeting is expected to be a “live” one. As a result, the market probability for a December rate hike has increased from 50% last week to 56% as of November 5 (see chart below). So far it is working, with most key markets reacting predictably to the prospects of an “imminent” rate hike. Similar to last week, the reaction in financial assets was mixed, with fixed income and commodity markets selling off, the U.S. dollar (USD) surging and equity markets growing stronger.