Although an interest rate hike by the Fed has already been priced in by the markets, the forward looking market will likely be studying the FOMC’s economic projections update intently for their 2017 view.
Fed hike and projections
At 100% probability that we will get a 0.25% rise in interest rates, based on Fed fund futures, there is little contention on the next Fed move. On the contrary, the Fed will be stealing Christmas should they not be taking off. The real debate, however, could lie with the Fed’s summary of economic projections update.
In addition to the projection of economic indicators, the Fed will also provide an updated view with regards to the projected policy path. Significant changes here could be market moving. A rosier outlook or higher interest rate projections could refuel the USD rally, with the USD index having seen a ceiling lately.
On the other hand, we have also heard earlier this week from New York Fed President William Dudley that it might be ‘premature’ to raise the growth outlook. He substantiated that there remains little known about the size of the fiscal policy that has helped to energize markets lately.
With the Fed seeing the same foggy outlook as the markets, it will be of no surprise should the Fed leave the outlook unchanged and solely deliver the 25 basis point (bps) raise. This would then see the markets with little to no reaction as with the previous round in December last year. Our base case for next year points to the status quo of two 25 bps increases.
For Asia, the pressure on the currencies is likely to sustain. Particularly given the fact that the two 25 bps hike would still be 100% more than what we have seen for 2015 and potentially 2016, barring no surprises next week. Unless a significant ramp up of the outlook projections is reported, Asian currencies should however see little pressure in the week.
While we will also have the Bank of England (BoE) meeting with no changes to the interest rate expected, Asian markets will largely have their focus on several key economic indicators due in the week ahead.
Japan’s fourth quarter Tankan, or short-term economic survey of enterprises, would be key ahead of the Fed interest rate decision. The market consensus is pointing at an improvement across the board and that could further add to the improvements already seen in the markets.
Meanwhile China’s November foreign direct investments, aggregate financing, new yuan loans and M2 are expected to improve. Likewise for November retail sales, expected at 10.2% year-on-year (YoY) from 10.0% YoY previously. Fixed asset investments and industrial production however could remain status quo based on market consensus.
Bank Indonesia (BI) and Bank of Korea (BoK) will also meet next week with no change to interest rates expected as well.
Closer to home, the market will be paying close attention to Singapore’s November non-oil domestic exports (NODX). Alongside the trend seen in top trading partner, China’s November trade, Singapore’s NODX is also expected to trend higher, albeit remaining in negative territory. A surprise on the upside would nevertheless counter some of the gloom for the local markets.