FOMC, waning confidence, and weak wage growth push back rate rise expectations

Week ending Friday 3rd February 2017

We have argued that it is quite likely there will be just one rate rise in 2017, right at the back of the year just like in 2015 and 2016. Events this week did nothing to shake that view. The FOMC was less hawkish than feared, surveys appeared to peak or even wane when the Trump confidence bounce and wage growth most definitely disappointed.

Payroll Friday

Fascinating reaction to the payroll numbers on Friday in the US. Jobs growth was stronger than expected but since it´s a heavily revised number, it is not taken too seriously. Less revised is the actual payroll data for wages and this showed very disappointing growth, both MoM and YoY.

Classic “bad news as good news” day

Interest rate expectations and the USD fell back as monetary policy responded more dovishly than anticipated, while stocks rose for the same reason. Equities rallied as the likelihood of a Fed rate hike was pushed back. It was a classic “bad news as good news” day.

Trump, lively as ever, was mostly negative for equities this week until Friday

The good end of the week for equities meant a recovery from a bad start. There were a number of reasons for the bad start but, most likely, it was due to a variety of missteps by Trump in various executive actions relating to things such as travel bans and diplomatic relations with allies. Economic news seemed to show a waning of the Trump confidence bounce too, but it is still a battle in that area.

On Friday, some very aggressive noises about repealing various bits of financial regulation caused a flurry of interest in the financial sector, causing rallies in the large banks stocks and helping push up the S&P500, already boosted by the weak wage growth.

FOMC helpful for once

The less hawkish FOMC statement accompanying their decision to hold rates saw bond yields and the USD drop back and equities to rally a small bit.

The dominant theme remained the new administration’s urge to keep the USD weak, and the fact that the FOMC did not seem to want to challenge it. This means an accommodative monetary policy, and equities like it like that. Longer-term bond yields do not see it as any more inflationary as they merely followed shorter yields, keeping the yield curve steady.

Next week is particularly quiet on the survey and data front. It is, however, unlikely to be quiet on the Trump front.

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