FOMC Raises Rates by 25 Basis Points

As widely expected, the Federal Reserve raised interest rates in the US by 25 basis points early this morning. This brings the interest rate to 1.25% (technically it's a band from 1.25%-1.5%) which brings US rates virtually in line with Australian rates. The rate statement was also relatively hawkish, indicating that three more rate hikes are expected in 2018. The notable exception to the hawkish tone was the dissent of two FOMC members who would like to see inflation move back towards 2% before continuing the rate hikes. Despite the planned rate increases, the median target for rates in 2020 is just 3.0% according to the 'dot plot' of predictions by each of the FOMC members. From a historical perspective, this is still below the average interest rate over the past 30 years. US Stock markets took the rate hike in stride, although the S&P 500 did drop into the close and finished slightly down for the day. The Dow Jones closed up 0.3%.

Despite higher rates normally being a negative for gold, gold was one of the big winners overnight, climbing US$10 and breaking a downtrend that had existed for the past two weeks. Surprisingly, the Aussie dollar has also climbed overnight and the US dollar index has fallen. These moves are all the opposite of what one would normally expect from a 'hawkish' rate hike in the US but may simply reflect the fact that the hike was so well priced-in in advance that it was a case of 'buy the rumour, sell the fact'.

Although it was completely overshadowed by the Fed decision, US CPI data also came out last night which showed that core CPI (excluding food and energy) was weaker than expected. This is part of the reason that two of the FOMC members dissented against the rate hike on the basis that inflation is still below the target level.

Today Australia's employment data is released, with 18,100 new jobs expected. Later on, Chinese industrial production data will be released. Also, later tonight, the Bank of England (BOE) is due to make its interest rate decision. Expectations are for no change in rates as the BOE waits to see the effect of its November rate hike. Soon after that, the European Central Bank (ECB) makes its interest rate decision at which rates are expected to be kept on hold at 0%.  

Data Releases:

–    Australia Employment Data 11:30am AEDT

–    China Industrial Production 1:00pm AEDT

–    UK Retail Sales 8:30pm AEDT

–    UK Interest Rate Decision 11:00pm AEDT

–    Euro Interest Rate Decision 11:45pm AEDT

–    US Retail Sales 12:30am AEDT

To view the Rivkin economic calendar and Local Markets matrix, members can click here.

This article was written by William O'Loughlin – Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via william.oloughlin@rivkin.com.au or by phoning +612 8302 3633.