FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- U.S. stock markets continued to rise, with all three major indices reaching record highs. Economic data on the domestic front was generally constructive, with a number of indicators surprising to the upside.
- The Fed minutes released this week confirmed what many already believed, mainly that the economy is making progress and that a rate hike is likely to come ‘relatively soon’. The market is now fully pricing in a rate hike in December.
- With limited details on the scope and timing of fiscal policy, the path of interest rates beyond December is perhaps even more uncertain in the election’s aftermath.
MUCH TO BE THANKFUL FOR
With markets closed on Thursday in observance of Thanksgiving, this was a short, but exciting week. Investors continued to pull money out of emerging markets, while U.S. stock markets continued to rise, with all three major indices jumping to record highs for the first time since 1999 (Chart 1). Long-term yields started the week at a slightly lower level, but sold off through the week. At the time of writing, the 10-year yield was slightly higher than last week’s close and up an impressive 56 basis points from the start of the month.
These market dynamics were largely responsible for boosting the value of the U.S. dollar against other major
currencies. The DXY index currently sits at a 13-year high. Economic data on the domestic front was also generally supportive, with a number of indicators surprising to the upside. Consumers felt upbeat in the aftermath of the election, with the University of Michigan consumer sentiment beating expectations and recording the largest single monthly gain since late 2013. This should bode well for consumer spending during the important holiday season. Durable goods orders also shattered expectations, rising 4.8% m/m in October, reinforcing an emerging recovery in business investment.
Data on housing was more mixed, with new home sales falling more than expected, but existing home sales surprising to the upside and reaching the highest level since February 2007. The recent climb in interest rates will likely pull forward home sales as consumers try to lock in rates, while having a dampening effect on activity in subsequent quarters. The recent back-up in mortgage rates may slow, but is unlikely to derail the U.S. housing recovery. Rising employment and wage growth should continue to be the dominant factor in driving future home sales.
With respect to interest rates, the Fed minutes released this week confirmed what many already believed, mainly that the economy is making progress and that a rate hike is likely to come ‘relatively soon’. The market is now fully pricing in a rate hike in December with a probability of 100%. Rising inflation expectation in the aftermath of the election have strengthened the case for a hike, while next week’s payrolls report should provide further support with consensus expecting a gain of 180k – well above the level necessary to keep downward pressure on the unemployment.
As a result, the million dollar question has shifted from whether the Fed will hike to how fast it will hike going forward. Fed officials have been consistent in telegraphing a gradual hiking cycle. Still, with the unemployment rate quite low, there is a possibility that the economy may run a little hot, especially with the fiscal stimulus that has been pledged by the new administration. If that is to materialize, the hiking cycle would likely run a little faster as well.
As such, the path of interest rates beyond December is perhaps even more uncertain now than before the election. More clarity is likely to come in late January when the new administration begins to implement its agenda, while the Fed adjusts accordingly. For now, with the economy in decent shape and most financial and domestic data chiming in festive tunes, there is much to be thankful for.
Admir Kolaj, Economic Analyst
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