14 Dec 2017

Market Brief: May loses her way

Sana Hanassi-Savari

Dealing team

The Fed raised interest rates by 25bp as expected, on a 7-2 vote with members Kashkari and Evans dissenting.

Today's data release
  Key levels
09:00 Eurozone Markit PMIs   Support Resistance
09:30
UK retail sales GBP/ USD 1.3220 1.3520
12:00 BoE announcement GBP/ EUR 1.1135 1.1565
12:45 ECB announcement      
Market overview

The Fed raised interest rates by 25bp as expected, on a 7-2 vote with members Kashkari and Evans dissenting. The market seems to have taken a slightly dovish take on the FOMC meeting with 10y treasury yields lower post the announcement and the US dollar index down 0.71% for the day. In the details, the Fed now projects the labour market to remain strong with a lower unemployment rate of 3.9% and stronger GDP growth across the forecast horizon, particularly next year where growth is expected to be 2.5% (vs. 2.1% previous), in part due to the expected tax plans. Despite these positive revisions, the Fed’s forecast for core inflation and the dot plots were broadly unchanged, with median expectations of three more hikes in 2018 and CPI of 1.9% in 2018 and 2.0% in 2019 & 2020. Mrs Yellen also gave her last press conference as the Fed Chair. She was fairly positive on the economy, noting that risks are balanced and there is less to lose sleep about now.

On US tax reform, President Trump noted the Senate and House negotiators have reached a tentative agreement and he hopes to sign the tax bill “in a very short period of time”. Some of the compromises noted by Bloomberg include: i) corporate tax rate of 21%, but beginning in 2018, ii) mortgage deduction limit of $750k, iii) top individual tax rate of 37%, iv) 20% deduction on pass through business income, and v) repeal the alternative minimum tax.

The UK Government lost a vote (305-309) in the commons which makes it more likely that the final Brexit deal will have to get approved by Parliament and thus decreases the possibility of a hard Brexit but complicates the negotiation process. The Pound is firmer against the USD this morning.

In the UK, the labour market release presented a mixed bag of outturns. Unemployment in the three months to October remained unchanged at 4.3%, defying market expectations of a small fall to 4.2%. Meanwhile employment fell 56k in the period, its biggest drop since May 2015 and a worse out turn than the market consensus of a 40k fall. At the same time headline average weekly earnings firmed to 2.5% (3m YoY) as expected.

The day ahead

Looking at the day ahead, there is the European Council meeting in Brussels which continues into Friday with Brexit high on the agenda with Mrs May arriving after her voting loss last night. We’ve also got two central bank meetings due with both the BoE and ECB set to keep monetary policy meetings unchanged. Data wise we’ll get the flash December PMIs in both Europe and the US, as well as the November retail sales data for the UK and US.

Thought of the day

The Christmas party season is well under way. It is a time for most us to let our hair down and celebrate with friends and colleagues, but employees must be careful what they get up to at the office party as it may come back to haunt them! Dodgy dancing, loads of booze and loose lips: the office Christmas party is a minefield of potential embarrassing missteps. A number of do’s and don’ts are posted all over the internet but for most people this should be second nature. The Investec treasury team have their Christmas party tonight but don’t fear we will be ready and raring to go on the desk tomorrow morning to help with all of your FX needs. After a big week of central bank meetings, Theresa May suffering her first defeat on Brexit in parliament and data aplenty, there is lots to discuss. Give your Investec dealer a call on 0800 055 6339 and maybe we can even fill you in on any Christmas party shenanigans!

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