Yellen's FOMC delivers the goods; global oil proves difficult to tame; close call in the Netherlands
“The simple message is the economy is doing well”
Fed rate hike: The plot thickens Last Wednesday's 25 basis-point hike was well-anticipated by markets, with implied probabilities ranging from 90% to 100% for nearly two weeks beforehand. But the announcement still managed to surprise: there was virtually no change in the FOMC members' anonymous forecasts for future hikes (captured in the chart known as "the dot plot") – which still calls for a total of three hikes this year and another three in 2018.
The dot plot is considered to be a proxy for FOMC members' outlooks for economic growth; the stable plot was read as "no change" in the Fed's economic outlook – perhaps signaling the Fed's collective confidence in its own forecasts. That confidence was supported by the consumer price figures announced earlier in the day; headline consumer prices rose 2.7% for the full year to February. Not counting food and energy, the rise was 2.2%. Another confirming data point: the Job Openings report for January (the "JOLTS" report) showed the closely-watched rate at which workers leave one job – presumably for another – to have risen to 2.2% for the first time since the end of 2015, and only the second time since early 2008.
Fixed-income markets appeared to expect an upward shift in the chart; yields had risen in response to the Fed's clear signaling about the impending hike the week before the meeting. But the lack of change in the dot plot drove yields down notably for the day. Example: 2-year Treasuries fell over 10 basis points (bps) to 1.293 percent on the news; 10-year Treasury yields fell about 8 bps to 2.493 before recovering slightly.
Global oil: Little relief Two related issues impacting OPEC's attempts to reduce the global glut of crude: the resurgence of U.S. producers, and the desire of Middle-Eastern producers to keep market share in Asia. Results: increased flows to Asia from Gulf producers, and crude oil prices under continued pressure, with WTI trading at about $49 per barrel and Brent at $52.05. Both prices are notably below their levels following January's agreement among producers to restrict supply.
European elections: Nix on Nexit The anxiety surrounding the rise in support for nativist candidate Geert Wilders was reduced by his party's failure to win enough seats to call the shots in forming a ruling coalition. Optimism among pro-EU factions was tempered, however, by the fact that right and center-right parties gained ground in the high-turnout election. The incumbent Prime Minister, Mark Rutte, was given the task of forming the next government, which should be put in place over the next days or weeks.
China and Hong Kong: Two hikes, two reasons Hong Kong's currency, the Hong Kong Dollar, is tied to the U.S. dollar as a matter of policy; one way to ensure the connection is to link their interest rates. That's why the Hong Kong Monetary Authority increased its benchmark rate by 25 basis points to 1.25% on the back of the Fed's change last week. On the other hand, China's lifting of interest rates of two open-market-operation tools, the six-month and one-year medium term lending facilities (both up 10 basis points to 3.05% and 3.2% respectively, along with the 10-bps boosts of two repo rates), are decided by the market and do not mean China is raising interest rates, according to a statement from the People's Bank of China.