Jerome Powell got his big chance to hike rates today and did not miss out on the opportunity. Where analysts were expecting a discussion around economics, Powell gave them reason why he would be hiking three more times this year and perhaps another three next year. The path to normalisation is steeper.
Citing jobs growth and an expanding economy as major factors for the tightening, Powell was confident that the economy would continue to expand despite the rate hikes. The Fed Board voted unanimously to hike rates (8-0) from 1.5% to 1.75%.
The projected median rate by the end of 2019 is now 2.9% and rates are seen at 3.4% in 2020. The Fed is projecting economic growth for 2018 at 2.7% versus an earlier projection of 2.5%.
So, what did markets make of this? Earlier in the day, equities were travelling nicely with the S&P 500 up 1%, only for the index to collapse once the Fed’s intentions were known. With most G20 central banks now on a course of normalising interest rates, equity markets are likely to see increased volatility and a necessary attention to valuations not multipliers. Slowly but surely the markets are behaving in a more normal fashion.
Facebook continues to make the headlines and all for the wrong reasons. The Cambridge Analytica scandal is not going away anytime soon. The data breach and use of private information is being viewed as a major issue. Energy was a big winner today, up 2.6%. Even stocks were generally choppy. Financials initially benefited before falling away at the end. Trading was thin on the day due to today’s snowstorm.
Bond markets reacted to the hike in a sanguine manner. For the moment, bonds are attractive. But for how long? Concerns over rising bond supply and a widening deficit is now starting to weigh on the market.
More money for the Wall and fighting Russian hacking is expected to be added to the $1.3 tr U.S. government spending bill being shape currently by Congress. The current debt ceiling has until Friday before it expires and there is expected to be a lot of debate over the Bill to extend funding to September 30.
Traders expect that the recent trade data showing huge deficits will feed into first quarter GDP and be a drag on growth. For traders elsewhere, the impact of U.S trade tariffs are an unknown and so too the reaction of various Governments. A rocky path is expected.
Equities: The S&P 500 fell 0.2%. The Dow fell 0.2% and the Stoxx 600 fell 0.2%. The Vix closed at 17.86.
Currencies: The Bloomberg Dollar Spot Index fell 0.9% while the euro rose 0.8%.
Bonds: The ten-year closed around at 2.88%. The 2-year closed at 2.308% and the 30-year closed at 3.111%. The ten-year bund closed at 0.59 and the UK gilt closed at 1.526% and the OAT closed at 0.829%. The U.S. curve closed 2/10 at 57.5 bp, 2/30 at 81.1 bp and the 10/30, closed at 23.4 bp. The U.S. 5-year closed at 2.67.
Commodities: The WTI rose 3.0% after it was reported that inventories were lower than expected. Gold rose 1.9%.
Bitcoin is trading around $8,920. There is a chance that trading bitcoin could become problematic after it was reported that bitcoin was being used by criminals to facilitate purchases in illegal activities. This is now in the sights of various regulatory authorities in the U.S and elsewhere.
Aussie Market Today.
The Aussie equity market should be slightly weaker over the day.
Bonds should see a little improvement. However, the general trend appears for a slight rise in rates as markets ponder what normalisation of interest rates means. The rate hike in the U.S. may pressure the front end of the curve whilst the long end should see a little demand.
The currency should be stronger against a weaker U.S. dollar. However, this may change on Friday when Trump announces his tariff policy for which no country is immune, even the much heralded no tariff on our cottage steel and aluminium exports to the U.S. No agreements have been made just an assurance.