Markets Today: Zirp Rip

Nine and a half years on from the last Fed rate hike and seven years on from when interest rates were first set at the effective zero lower bound (0-0.25%) the Fed has seen fit to sound the death knell for ZIRP, lifting the target rate for the fed funds rate to a range of 0.25-0.5%.

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Nine and a half years on from the last Fed rate hike and seven years on from when interest rates were first set at the effective zero lower bound (0-0.25%) the Fed has seen fit to sound the death knell for ZIRP, lifting the target rate for the fed funds rate to a range of 0.25-0.5%.

In contrast to those looking for the most ‘dovish hike’ in Fed history, there is nothing in the surrounding atmospherics accompanying the rates announcement to immediately validate this view. For one, the decision to raise today was unanimous (this after two Fed governors, Daniel Tarullo and Lael Brainard) had been expressing scepticism towards the need for – and risks arising from – higher rates. Second, the median ‘dot point’ forecast for the expected fed funds rate at the end of 2016 remains at 1.375%, implying four quarter point moves up next year and unchanged from the September FOMC meeting. Third, the median estimate for the ‘longer run’ fed funds rate remains at 3.5%. The dovish tinge comes from the fact the median dot point forecast for end 2017 is lowed by 0.25% to 2.375% and for end 2018 by just 0.125% to 3.25% (see Chart of the Day).

By and large the Fed has delivered on market expectations, hence a fairly muted reaction, with the FOMC’s view on the labour market upgraded (underutilization of labour resources has diminished “appreciably”) and the Fed now saying it is “reasonably confident that inflation will rise, over the medium term, to its 2 percent objective”.

That the US dollar has traded slightly lower, not higher in the hour since the Fed announcement, says much about market positioning running into the FOMC meeting (i.e. still very long dollars, notwithstanding the shake-out of short EUR positions post the 3 December ECB meeting). Lack of any fresh upward pressure on US yields (which have, at 10 years, moved below pre-announcement levels) also reduces one justification for an immediate strengthening of the dollar. We suspect that when the dust settles on the Fed’s pronouncements (not that much has been stirred up so far) the dollar will gain a little more traction – and with that the AUD will drop back below 0.72 cents and – NAB’s FX strategy team expects – down to near 0.70 in coming weeks.

US equity market have by taken the Fed in their stride, ending the day slightly up on pre-announcement levels, while commodity prices – with the exertion of oil (down another $1.25-1.50 today) like the fact that the dollar has so far traded down not up out of the Fed.

Coming Up

With the Fed now just about behind us, the last key event risk of 2015 has (hopefully) passed and participation across financial market will now be in serious wind-down mode.

In the local time zone, 08:45 AEDT sees the NZ Q3 GDP report. Our BNZ colleagues expect a quarterly increase of 0.6% (consensus 0.8%) for an annual expansion of 2.0%. Risks are for something more than this, in particular after yesterday’s balance of payments data. Generally speaking, the message is likely to be that the economy has improved its pace over the second half of 2015, after a slow first half, and that the leading indicators are beginning to suggest upside risks to current moderate GDP growth forecasts for 2016.

In Australia, the RBA publishes its latest research bulletin, which will keep some of the pointy heads happy but will probably pass the rest of the market by. Japan’s trade data is due at 10:50 AEDT and expected to show a small (~¥200bn) deficit in seasonally adjusted terms, similar to October. The BoJ meets Friday and we are not looking for any change – or hints of a change – in policy at this juncture.

Offshore this evening, it’s the German IFO survey (following improvements in the ZEW survey reported on Tuesday); UK retail sales (expected to bounce back after the unexpected weakness in October); and in the US, the Philly Fed (probably the highlight), current account and weekly jobless claims.

Overnight

On global stock markets, the S&P 500 was +1.30%. Bond markets saw US 10-years +1.95bp to 2.29%. On commodity markets, Brent crude oil -3.28% to $37.41, gold+1.3% to $1,077, iron ore -0.5% to $39.18. AUD is at 0.722 and the range was 0.7177 to 0.728.

• US November housing starts 1173k (+10.5%) vs. 1130k (+6.6%) expected; Building permits +11.0% to 1289k.
• US November industrial production -0.6% (-0.2% expected, -0.2% previous) but driven by a weather-related slump in utilities output. Manufacturing 0.0%.
For full analysis, download report:

Markets Today: 17 December 2015 (PDF, 301KB)

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