Dec 10, 2016 - FOMC - The last big event in 2016 that we know about…

The last big event in 2016 that we know about is coming. Can we expect any bad surprise from Yellen and her team? The probability of a 25 bps rate hike to 0.75% level is around 95%, in other words it is widely expected. Strong US data, the rise in bond yields and inflation expectations, and bullish stock markets seem to be supporting the case.

Facts

-          Probability of a 25 bps rate hike is priced at 95%

-          The hike is consistent with comments from Fed officials over the past few weeks as well as

-          US data coning in strong, the Trump presidential victory is pushing bond yields higher, reviving inflation expectations despite low crude oil prices and bullish stock markets towards the end of  year seem to be supporting the case

-          The pace of rate hikes in 2017 will depend on an increase in inflation, pace of labor market improvements and economic growth

-          Four members having the last meeting this week

Expectations

-          After last week’s ECB we expect volatility primarily in EURUSD, USDJPY and Gold but stocks as well as Emerging markets assets will not stay aside once the market will start to move

-          The hike may give additional support to USD towards the end of the year and in 2017

-          The Summary of Economic Predictions (SEP) should not deviate from the rhetoric and macro data we have seen in the past weeks

-          It is still very difficult to predict the tone of Yellen’s speech as she is clearly dovish but would need to acknowledge the good data and rate hike

-          Would be interesting to see whether they will mention the faster pace of rate hikes in 2017 on the back of bond yields jumping higher

-          Very likely after the FOMC meeting the markets will switch to Christmas holidays mode with nothing really going on but low liquidity and abrupt moves

By the way, I am sure you have already figured out that the stocks despite the expectations of rising rates are moving higher. Shouldn’t they be lower?

Well, the Trump’s expected corporate tax rate cuts and deregulation do the job.

Before we actually get to FOMC meeting let’s check what history can show us first.

Every significant Capacity utilization increase was followed by rise in interest rates:

To refresh the memory have a look at Historical rates (Source: Wikipedia):

Enjoy...

Good luck Champs!

Mr Hawk

DISCLAIMER: This material was created for informational purposes only and represents the Land of Trading team’s view of the past and current economic and capital market environment. It is not an investment advice and should not be viewed that way at all, and the creators of this material cannot be held liable for any potential losses resulting from trading, where despite this disclaimer someone would consider this material as an investment advice. All rights reserved ©2016. Contact: landoftradingATgmailDOTcom