On 14 December, 2016 – The Federal Reserve increased its interest rate as expected

US stocks reacted negatively to the FOMC’s interest rate move.
United States
The Federal Reserve did what was expected today and raised its federal funds interest rate range to 0.50 percent to 0.75 percent for a median of 0.625 percent. While US stock indices were relatively unchanged prior to the announcement, they tumbled during Fed Chair Janet Yellen’s press conference and into the close. The Dow Jones industrials were down 0.6 percent, the S&P declined 0.8 percent and the Nasdaq lost 0.5 percent. The S&P slide was its steepest since October 11.
Utilities and real estate stocks faced selling pressure. Hertz Global Holdings declined after the struggling car rental company named a new chief executive officer. The company’s three longest-serving directors will also leave the board next month. Nordson, a maker of products that apply adhesives and coatings, advanced after reporting higher sales and earnings than expected. It also said orders look strong for its current quarter. Neustar jumped after a group of private investors said it would buy the communications company for $33.50 per share in cash.
As expected, the Federal Reserve raised its target range for the fed funds rate by 25 basis points to a range of 0.50 percent to 0.75 percent. The vote was unanimous. Descriptions of the economy were little changed. Job gains were described as “solid”, household spending called “moderate” and business investment still “soft”. Inflation was also described as mostly soft. The FOMC still sees the economy expanding at a moderate pace and sees near-term risks as roughly balanced. The FOMC’s quarterly forecasts indicate that three rate increases are expected in 2017, up from two in its previous September forecasts.
In her press conference, Fed Chair Janet Yellen said all 17 members of the FOMC did discuss the outlook under the incoming Trump administration and recognized that there is “considerable uncertainty” on how policies may change. But she said the FOMC has time to “wait and see”. She put into perspective the possible impact of new fiscal spending, saying it would be only one factor among many, such as changes in global demand or oil prices, that could affect policy. Ms Yellen also said that the rate increase is a vote of confidence and described both the economy and labor market as strong.
These data reflect observations at 4:00 PM US ET. Gold at the afternoon London fixing was up US$3.70 to US$1,162.25. Copper futures were unchanged at US$2.60. WTI spot crude was down US$2.07 to US$50.91. Dated Brent spot crude was down US$1.92 to US$53.80. The US dollar was up against all of its major counterparts including the yen, euro, pound, Swiss franc and the Canadian and Australian dollars. The Dollar Index was up 1.2 percent. The yield on US Treasury 30 year bond was up 6 basis points to 3.19 percent while the yield on the 10 year note jumped 11 basis points to 2.58 percent.
Europe
The European markets retreated Wednesday as investors exercised caution prior to the Federal Reserve announcement which would take place after markets here closed for the day. The FTSE and SMI both lost 0.3 percent while the CAC declined 0.7 percent and the DAX was down 0.4 percent.
Bank of Spain raised Spanish growth forecasts for this year and next, saying that an accommodative monetary policy, the expansionary fiscal policy stance and the lagged effects of the decline in oil prices offset the impact of political instability in the country and the ‘Brexit’ vote. Gross domestic product likely grew 3.2 percent this year, which was slightly better than the 3.1 percent expansion seen in September. However, growth is expected to slow sharply in 2017 as rising oil prices constrain purchasing power. There will be little scope to further lower interest rates and fiscal policy could abandon the expansionary stance of the past two years, the Bank said. However, the growth projection for next year was raised to 2.5 percent from 2.3 percent.
In Paris, Vivendi announced that it now owns a 12.32 percent stake in Italy’s Mediaset as of December 13, 2016. Vivendi declined but Mediaset advanced in Milan. Sanofi declined after the Wall Street Journal reported that it is in talks to acquire Swiss biotechnology firm Actelion Pharmaceuticals. Actelion tumbled in Zurich after Johnson & Johnson ended discussions to acquire the company.
In London, Micro Focus International gained after it reported earnings per share of 38.12 cents for the six months ended 31 October 2016 compared to 38.58 cents last year. Fresnillo and Randgold Resources gained after gold prices rebounded. Polymetal International also jumped. Inditex reported that its nine-month net profit increased 9 percent to €2.21 billion from €2.02 billion last year. Metro declined after it reported that its fiscal 2016 profit attributable to the shareholders totaled €599 million, below last year’s €672 million. Both Fresenius and Fresenius Medical Care retreated.
Eurozone October industrial production slipped 0.1 percent on the month. The UK ILO unemployment rate stayed at the lowest level since 2005. The jobless rate was 4.8 percent in the three months to October.
Asia Pacific
Stocks were mostly unchanged as investors stayed on the sidelines ahead of the Federal Reserve announcement. The Nikkei, Hang Seng, Kospi and STI all were virtually unchanged on the day.
The Shanghai Composite declined 0.5 percent because of regulations on risky investments by Chinese insurers. The Hang Seng was unchanged (up 9.92 points).
The Nikkei edged up 3.09 points while the Topix slipped 0.1 percent. The Bank of Japan said that the Tankan business survey that monitors business sentiment was up in the fourth quarter of 2016. Large manufacturers’ index was plus 10, in line with expectations and up from plus 6 in the previous quarter. Large nonmanufacturing index slipped from 18 to 16 in the fourth quarter. CAPEX reading for all industries was 5.5 percent, down from the previous estimate of 6.3 percent.
In Australia, both the S&P/ASX and All Ordinaries were up 0.7 percent. Among the major miners, Rio Tinto and BHP Billiton declined. Tatts Group said it has received an A$7.3 billion takeover bid from Pacific Consortium, rivaling the A$6.4 billion merger offer made to it by Tabcorp Holdings in October, but has maintained its support for the Tabcorp deal. Tatts Group shares gained while Tabcorp shares were lower.
The Kospi added 0.89 point in cautious trading before the FOMC decision announcement. The Sensex was down 0.4 percent in a volatile trading. India’s November wholesale price inflation slowed for the third consecutive month. The WPI was up 3.15 percent, down from October’s 3.39 percent.
Looking Forward
Australia posts its November labour force survey. December flash manufacturing PMIs will be reported for the Eurozone, France, Germany, Japan and the US. The Swiss National Bank publishes its quarterly monetary policy assessment. The Bank of England announces its monetary policy and publishes its meeting minutes. In the US, November consumer prices, December Philadelphia Fed and Empire State surveys along with weekly jobless claims, money supply and Fed balance sheet.
Global Stock Markets

*Note — all releases are listed in local time.

Source: Fidelity

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