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Dovish hike from Fed – as expected

By Hamish Muress

Whilst running through the annual Bank of England Christmas Quiz yesterday, two things became apparent both of which are relevant in today’s market report. First of all, in ‘A Christmas Carol’ by Charles Dickens (written in 1843) Scrooge pays Bob Cratchit just 15 shillings a week which according to the latest CPI figures would equate to around £60 today. Inflation figures released yesterday came in as expected at 2.3%, which seems a long way from the dizzying 3% that was printed at the start of the year. Under these circumstances the Bank of England would not be motivated to tighten interest rates and with the Bank meeting today this is entirely expected. Indeed secondly, according to the BoE themselves they have only changed rates once on Christmas Eve and that was in 1857 when they cut rates (a Christmas miracle and to the relief of Bob Cratchit).

In other news Jeremy Corbyn was in the hot seat yesterday having supposedly called Theresa May a ‘stupid women’ as she criticised his leadership of the Labour Party over the last few weeks. Brexit still dictates the performance of the pound and with deadline day less than 100 days now seems a perfect opportunity for Parliament to go into recess and MPs to take a 20 odd day break.

The Federal Reserve interest rate decision last night was certainly the highlight of the week so far for investors. As expected the Fed raised interest rates once again by another 25 basis points, bringing the total number this year to 4 hikes and a 100 basis points. This was all as expected by markets who were largely more interested in the Fed Dot Plot which takes the median view amongst Fed members for future hikes. The number of hikes anticipated for 2019 had been three however this was lowered down to two hikes but crucially the market had thought this could be only one. In this regard the hike yesterday could be described as a dovish hike with a hawkish twist. The dollar rallied as a result and the market tipped their hats to Fed Chair Jerome Powell for continuing to defy pressure from Donald Trump.

Italy have finally struck a budget agreement and deal with the European Commission (a Christmas miracle) as both parties settled on a deficit target of 2% of GDP, down from 2.4%. At issue and still unsolved is the fact that Italy’s debt pile is €2.1 trillion or 131% of its GDP. This is second in the Eurozone only behind Greece and if growth does not reach the anticipated 1% next year this debt pile will only increase. For the time being though, the agreement has removed a major headwind for investors as the Euro looks to end the year on the front foot.

The Aussie dollar lost ground last night off the back the Fed decision with AUD/USD dropping briefly below 0.71, the lowest levels since the start of November. The Aussie wasn’t helped either by the jobs data which under the surface looked a little soft. Jobs growth beat expectations however unemployment climbed to 5.1%. For the Reserve Bank of Australia the strength of the labour market is crucial but as things stand there is a risk for the Aussie dollar that interest rates could in fact be cut in 2019 rather than raised.

Inflation out of Canada yesterday disappointed as expected due to the tumble recently in oil prices. Oil now sits below $55 per barrel, its lowest level since September 2017 and as a result Canadian inflation slumped to 1.7%, the first time in 10 months it had been below the target of 2%. USD/CAD broker 1.35 as expectations of any imminent interest rate hikes from the Bank of Canada have diminished.

The tumble seen in the Kiwi is twofold. First of all, it weakened against the USD off the back of the Fed decision last night, then New Zealand GDP for Q3 came in less than half expected at 0.3%. Not a good session for the New Zealand dollar.