The FED hiked! There are lot’s of very good commentaries out there, so I will just look at the details. The main words were the consensus was unanimous and rate hike gradual with a wait and see approach.
The Fed predicts a faster rates of hike (25bps per quarter) versus the market ( two 0.25bps).
The motivation could be that Yellen looks at the employment data. There is a subset of the really employable people (well you can’t hire an electrician for a banking position and vice versa) and that figure is practically at full employment…so salary have to rise. This will be one of the main source of volatility for 2016.
Inflation is going to 2% (not towards).
They are not addressing the huge Federal Reserve balance sheet. They will be still rolling over maturities into buying securities as my friend Pippa Malgreem says…if this is hawkish…it is a joke.
What happened just after
Stocks after an initial muted response jumped (expected rate increase and expected dovish commentary).
Gold jumped, oil and gold were dumped and bond were pumped up.
The awkward thing is that the longer dated US bond yield went lower…indicating an increase probability of …rate cut (or at least non movement) – definitely the market does not believe the 4 rises per quarter are doable.
So the main questions for the market 2016 will be.
- Is it the rate increase sustainable? If not…Quantitative Easing 4?
- How fast the Fed will increase
- How they will address the rate increase with the huge balance sheet the US has?
So what is in store for 2016 after the rate hike (historically speaking)
- Higher volatility (risk)
- Market driven by earning as valuation get lowered
- High yield US corporate bond will bring us heightened risk
- Increase in bond yield will mean a lower search for yield – so high dividend shares will be less on demand (so foreign money will move out of Australia, specially banks) together with infrastructure
- favorite sector (US) financials, tech, healthcare, selected industrials
- favorite regions: Japan, Europe
- China will increase the de-pegging from the USD, with more currencies consequences. An initial rally in Emerging Market can be seen …but then you need to be very selective
So a more real market and not money printing – after March, be careful what you wish for…you just might get it as the Pussycat Dolls say it.
Until March, enjoy! Xmas Rally, as predicted in previous posts, just started
investorpolitico 