FED MINUTES: FOR SOME MEMBERS THE HIKE WAS A “CLOSE CALL”

07.01.2016, 11am • Fed minutes: For some members the hike was a “close call” Fed officials decided unanimously to raise interest rates in December after almost a decade, but the minutes of the meeting revealed that for some officials the decision to hike was a close call. The concerns arose from the low inflation that needs to be closely monitored. The debate over the outlook for inflation will be crucial to determine the future path of rate increases. Fed officials’ generally expect four more rate hikes this year, compared to current market expectations of two. Officials in recent days have emphasized they could lift interest rates four times this year, despite the stock market decline in the early days of the year. If the inflation data going forwards begin to improve, the market will have to re-price the number of rates hikes, which leaves room for the dollar to appreciate further. Still, FOMC members pointed to factors that could throw their inflation outlook off course. Further declines in oil and other commodity prices as well as the strong dollar, impose important downside risks to the inflation outlook.

• Overall, the message from the minutes was that if the economy disappoints, the Fed could hold off on rate increases. Likewise, it could accelerate the pace of hikes if the economy surprises with a rise in inflation and strong growth. The dollar remains data-driven and positive US data are needed to keep it in a bullish trend.

• Chinese stock markets stopped trading about 30 min after opening Even though China’s stock market regulators announced new rules to restrict major shareholders of listed companies to sell their shares, this was not enough to stabilize the markets. Chinese stock markets plunged more than 7%, triggering an automatic halt to trading for the 2nd time in 4 days. Spillover effects into other equity markets are likely, which could see funding currencies such as JPY, EUR and CHF outpacing their counterparts.

• Today’s highlights: Eurozone’s retail sales for December, a closely watched measure of household confidence, are forecast to have rebounded on a monthly basis after falling for the previous two months. The expected rise in the figure is likely to be due to seasonal factors as a result of increased shopping during the holidays. The bloc’s unemployment rate for the same month is forecast to have remained unchanged at 10.7%. Final consumer confidence for December is expected to confirm its preliminary reading, though this indicator is usually not a major market mover. Net-net, the market may pay more attention to retail sales, which could prove EUR-positive, at least at the release.

• From the US, initial jobless claims for the week ended on the 1st of January, are forecast to have decreased from the previous week. Even though this indicator is usually not a major market mover, just one day ahead of the US employment report for December, it may attract more attention than usual, especially following the solid ADP employment report on Wednesday. This could support the dollar further.

• The Canadian Ivey PMI for November is also due to be released, but no forecast is available. Given that the RBC manufacturing PMI for the same month declined, we see a strong possibility for the Ivey index to follow suit, which could weaken CAD a bit, at least temporarily.

• We have three speakers scheduled on Thursday’s agenda: Bank of Canada Governor Stephen Poloz, Richmond Fed President Jeffrey Lacker and Chicago Fed President Charles Evans speak.