While I’m reluctant to attribute movements in stock prices to specific events, this article says that the big run-up in stock prices (around 1.5%) today was due to the release of the Federal Reserve’s minutes of their last meeting indicating that “a core of officials backed a possible rate hike in December”.
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However, while a few officials felt that rate hike conditions “could well be met by the time of the next meeting” and the Fed’s commitment to consider a rate hike “at is next meeting”, there was a dissenting voice that encourages opposing sentiment.
It is becoming clear that the most important Central bank meeting in December is not that of the Federal Reserve but instead the European Central Bank on December 3rd.
In a break with history, equity markets responded positively to the prospect of a rate rise.
Trillions of dollars of reserves parked at banks and worries that bond markets are less liquid and stable than in the past have added to concerns that deep volatility could greet the Fed rate hike.
It’s always worth remembering that, in central banking, expectation matters just as much as what actually happens. The central banker is often like a striker who persuades the defenders that he’s going to go left or right, but then shoots straight down the middle while they’re distracted. The Taiwan dollar rose 1.1 percent to 32.650 versus the greenback, its highest since November 12, as foreign financial institutions bought the currency.
Underpinning the Fed’s forecast of continued growth is the strength of consumer spending.
“The question here is whether the emerging-market countries of Asia-and indeed of the world-are sufficiently prepared for these decisions, to the extent that potential capital flows and market adjustments can take place without major macroeconomic consequences”. It doesn’t want to tighten too early.
The US currency traded near a seven-month high against the euro as Fed policy makers inserted language into their October statement to stress that “it may well become appropriate” to raise the benchmark lending rate in December, minutes from the meeting showed. We’re at the stage where markets will feel very messed about if there isn’t at least a nod to doing so. Traders covered short positions in the worst-performing Asian currency so far this year.
And remember that the latest batch of minutes only came through before the terror attacks in Paris. And if it does, don’t expect to see further rate hikes until this one has been allowed to “bed in” for a good long time.
The Fed has effectively prepared the market for liftoff on December 16, and with CPI remaining steady, almost all the pieces of the liftoff puzzle are in place.
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Investors are betting the next rate cycle will be less volatile.
