What Big Institutions are predicting after Fed Hike
Thu Dec 15 2016
Ray Pierce (785 articles)

What Big Institutions are predicting after Fed Hike

Rate hike of 25 bps by Fed was 100% discounted
Rate hike might be the start of a more normal tightening cycle
Yellen emphasised the change in forecasts as only a modest adjustment
Market does not yet fully discount three rate increases in 2017
Strong dollar is today’s most crowded but that does not necessarily make it wrong
Twelve months further on we are more confident about the world economy

JP Morgan:
Hike projection is motivated by the recent decline in the unemployment rate outlook
Revision to rate outlook indicates Committee is skeptical of running a high-pressure economy
Recognize that the Committee will be sensitive to declines in the unemployment rate
We continue to look for two hikes next year

Credit Suisse:
Yellen is skeptical on fiscal stimulus as the Fed hikes rates
There were some additional hawkish surprises in the economic projections
Some of these hawkish shifts were likely a response to improving data
The longer-term framework for the FOMC appears unchanged after this meeting
Overall, the outcome of the December meeting is slightly hawkish
We continue to expect two hikes in 2017, at the June and December meetings

We continue to expect two rate hikes in 2017
language suggests we will not need to wait another year for another increase
Lack of a shift in economic forecasts implies that Fed officials are taking a “wait and see” attitude

Morgan Stanley:
The December FOMC meeting delivered a more hawkish message than expected
Decision resulting in a flatter yield curve with a cheaper intermediate sector
Further increases in interest rates should be accompanied by curve flattening
Better economic data or further clarity on changes to fiscal policy needed

BOA/Merill Lynch:
We consider today’s Fed developments a warning shot to risk assets
Yellen does not believe fiscal policy easing is needed with a very low 4.6% unemployment rate
View continues to be that US reflation and decompression with foreign yields is bullish for credit spreads

Maintain our stance of projecting two (not three) rate increases for 2017
Stance is consistent with the continued skepticism in current market pricing of Fed fund futures
Believe the drag from sustained high rates and the strong dollar may cause data realizations in early 2017

FOMC offered a hawkish surprise with upward shift in Fed’s rate projections
Yellen suggests dot shift reflects lower unemployment rate, some fiscal stimulus
We favor buying UST dips; we see further USD strength
We favor buying dips with the 10-year note’s yield over 2.5% in the near term

Ray Pierce

Ray Pierce

Ray Pierce is a Senior Market Analyst. He has been covering Asian stock markets for many years.


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