Fed Presses Accelerator On Rate Hikes, Economic Outlook Improves, Tariff Jitters


I. FOMC Meeting

Hawkish sentiments emanated from the new Fed Chair, Jerome Powell, last week as he presided over his first FOMC meeting. As widely expected, the Federal Reserve unanimously hiked the federal funds upper limit rate from 1.5% to 1.75%, the highest level in a decade. Further, more officials now think the pace of the Fed hikes may increase with some policymakers forecasting a total of four rate hikes in 2018, a more bullish outlook compared to projections in December.

Other key takeaways from the meeting included:

  • The committee is split in its expectations of either two or three more rate hikes this year, followed by potentially three and two more hikes in 2019 and 2020 respectively. Previously, most officials expected two hikes in both 2019 and 2020.
  • Forecasts released by officials, projected faster economic growth, higher inflation, and lower unemployment in coming years. Higher labor participation rate also attributed to the positive outlook.
  • Inflation is expected to reach the Fed’s target of 2% next year and remain steady in 2020.
  • Stimulative fiscal policy, increased government spending and consumer confidence and positive economic factors abroad gave way to the more bullish domestic economic outlook.

Ten-year Treasury yields touched 2.93% on the back of the Fed’s statement. The bond closed the week at 2.81%.

II. Other Central Bank activity:

  • The Bank of England held their key rate unchanged at 0.5%, although two policymakers unexpectedly voted for a higher rate, boosting the probability of a rate hike in May.
  • New Zealand’s central bank kept their cash unchanged at 1.75%, citing weaker inflation and growth expectations.

III. Chinese Tariffs – President Trump announced a plan to levy tariffs of up to $60 billion on imports from China. The plan also includes tighter restrictions on technology acquisitions and transfers by Chinese investors into the U.S.. The threat of a trade war fueled volatility as the stock market, particularly the technology and financial sectors, took a hit on Thursday after the announcement. Each of the major U.S. indexes underwent the biggest one-day percentage drop in six weeks, including the Dow declining more than 700 points. The Dow closed the week at 23,533.

IV. Brexit – the EU and UK discussed Brexit transition and agreed to leave trade ties unchanged until the end of 2020.

This week…

Market gurus have a slew of data to digest in the upcoming week. Friday is expected to be a light trading day given the Good Friday holiday.

Key U.S. Data includes:

Chicago Fed National Activity Index (Monday), Dallas Fed Manufacturing Business Index, January S&P/Case-Shiller Home Price Indices (Tuesday), Q4 GDP (Wednesday), Q4 GDP Price Index, Q4 Core Personal Consumption Expenditures (QoQ), Pending Home Sales, Personal Spending (Thursday), Core Personal Consumption Expenditures (YoY), March Chicago Purchasing Managers’ Index, Michigan Consumer Sentiment Index, EIA Natural Gas Storage change (Friday).

Fed officials scheduled to speak: William Dudley (Monday), Loretta MesterRaphael Bostic (Tuesday) and Patrick Harker (Thursday).

Overseas Economic Data includes: New Zealand trade data (Sunday), German Import Price Index (Monday), Eurozone Business Climate (Tuesday), Eurozone economic sentiment, German Consumer Confidence Survey (Wednesday), Swiss survey on business climate, Japan retail trade data, German unemployment rate (Thursday), Q4 GBP GDP (YoY)/QoQ), Q4 GBP Total Business Investment (YoY)/QoQ), GBP February Home Approvals, German Harmonized Index of Consumer Prices, CAD GDP, JPY Unemployment Rate, JPY CPI and CNY Non-Manufacturing PMI (Friday).