On 15 March, 2017 – The Federal Reserve increased its fed funds rate as expected
Stocks advanced but the US dollar tumbled along with Treasury yields.
United States
As anticipated, the Federal Reserve increased its fed funds interest rate to a range of 0.75 percent to 1.00 percent at Wednesday’s FOMC meeting. New Fed growth projections indicated that the FOMC expects to increase rates twice more in 2017. In reaction, the US dollar tumbled along with bond yields — investors were looking for a more ‘hawkish’ policy stance that would mean more than two more rate increases during 2017. Stocks meanwhile rallied. The Dow Jones industrials were up 0.5 percent, the S&P gained 0.8 percent and the Nasdaq added 0.7 percent. Energy companies advanced thanks to a recovery in oil prices.
The Federal Reserve’s outlook for the fed funds rate was unchanged at 1.4 percent or two more 25 basis point increases. The vote was 9 to 1 with Minneapolis’ Kashkari voting for no increase. Regarding inflation, the FOMC sees its stabilizing around their 2 percent target. They acknowledge that total inflation is already close to 2 percent though the core, which excludes food and importantly energy which has been on the climb, remains “somewhat below” target. The statement said that business investment has firmed somewhat — up from “soft” in January. The expansion was described as moderate while the labor market continues to strengthen.
February retail sales inched up 0.1 percent. Delays in tax return payments may be holding spending back somewhat. February consumer price index was up 2.7 percent on the year. Core CPI excluding food and energy was up 2.2 percent — both above the Fed’s 2 percent inflation target. The housing market index by the National Association of Home Builders surged to its highest level since 2005.
These data reflect observations at 4:00 PM US ET. Gold at the afternoon London fixing was down US$5.80 to US$1,198.80. Copper futures were up 1.3 percent to US$2.67. WTI spot crude was up US$1.12 to US$48.84. Dated Brent spot crude was up 94 US cents to US$51.86. The US dollar dropped against its major counterparts including the yen, euro, pound, Swiss franc and the Canadian and Australian dollar. The Dollar Index was down 1.0 percent. The yield on US Treasury 30 year bond was down 6 basis points to 3.12 percent while the yield on the 10 year note dropped 10 basis points to 2.50 percent.
Europe
Stocks advanced after fluctuating between small gains and losses. Investors were cautious as they waited for the Federal Reserve announcement and the results of the Dutch elections. The FTSE was up 0.1 percent, the CAC and DAX added 0.2 percent and the SMI was 0.3 percent higher. The Federal Reserve announcement would be made after markets here were closed for the day. The Dutch parliamentary election results which some observers see as a litmus test of populism in Europe won’t be known until the early hours of Thursday morning.
The Federal Reserve will conclude its 2-day policy meeting after the European close today. The Fed is widely expected to announce an interest rate hike. The central bank’s accompanying statement and forecasts are likely to be in focus as traders seek to gauge the outlook for further rate increases.
Volkswagen retreated after leaving the door open to a potential tie-up with Fiat Chrysler. Adidas advanced after the company said it expects to increase its North American sales 47 percent by 2020. Utility E.ON dropped after it reported a sharply wider loss in its fiscal 2016, attributable to Uniper spinoff and nuclear energy. For fiscal 2017, the company projects higher adjusted earnings as well as an increased dividend.
Zodiac Aerospace tumbled after a fresh profit warning. Hikma Pharmaceuticals jumped after the company reported better than expected results for 2016 and said new products and stronger sales will boost 2017 earnings. Miners Glencore, Antofagasta and Rio Tinto were higher.
UK ILO unemployment rate was 4.7 percent in the three months to January, down from 4.8 percent in the three months to December. This was the lowest rate since 1975.
Asia Pacific
Asian stocks were mostly lower Wednesday although a rebound in oil prices in Asian trading helped to limit overall losses to some extent. With expectations that the Federal Reserve would increase interest rates later in the global market day, traders looked for guidance from the Bank regarding its interest rate plans for the rest of the year.
The Shanghai Composite edged up 0.1 percent after Premier Li Keqiang’s news conference at the end of the annual meeting of China’s parliament offered few surprises. The Hang Seng declined 0.1 percent.
Both the Nikkei and Topix retreated 0.2 percent as the yen continued to strengthen against the dollar before the FOMC and Bank of Japan monetary policy meetings and the Dutch elections. Toshiba dropped after the company’s shares were put under supervision by the Tokyo Stock Exchange to see if the company meets the delisting requirements.
Both the S&P/ASX and All Ordinaries were up 0.3 percent — gains in the metals and mining sector offset declines among financials and healthcare stocks. Miners posted broad-based gains after Chinese iron ore futures surged more than 5 percent. BHP Billiton, Rio Tinto and Fortescue Metals Group rallied. Banks ended narrowly mixed as investors awaited Fed Chair Janet Yellen’s comments on future Fed tightening. Hearing implant maker Cochlear retreated on going ex-dividend.
The Kospi was virtually unchanged (down 0.78 point) after recent strong gains in the aftermath of the Constitutional Court ruling last week ousting now former President Park Geun-hye. The Sensex shed 0.2 percent as worrisome inflation data dashed rate cut hopes and investors exercised some caution ahead of the Federal Reserve’s interest rate decision due later in the day.
Looking Forward
Australia releases February labour force survey. The Swiss National Bank publishes its monetary policy assessment and the Bank of England announces its monetary policy decision. The Eurozone releases its final February harmonized index of consumer prices. In the US, February housing starts, March Philadelphia Fed business outlook survey, January JOLTS and weekly jobless claims, money supply and Fed balance sheet will be reported.
Global Stock Markets
*Note — all releases are listed in local time.
Source: Fidelity
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