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FOMC 13.12.17

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Thoughts from John Kicklighter 


Rate Hikes and Deferments in a Central Bank Run – This week is arguably the last full and active trading week of the year. While the next week will technically have five full trading days to utilize, the economic docket will cool off materially. In the meantime, we are facing a range of high profile listings, but there is no greater ‘scheduled’ theme on deck than the round of rate decisions due Wednesday and Thursday.


Of the four major central banks due to weigh policy (Fed, ECB, BoE and SNB), it is the US central bank’s policy update that carries the greatest weight. Sure, the market has assigned an extreme degree of probability that the US central banks will hike rates (approximately 98% according to Fed Fund futures); but what truly matters is the contrast. There is a wide divergence between the Fed and its major counterparts and that gap in yield is only expected to widen.


And yet, the rate advantage has not afforded the Greenback any substantive lift. Borrowing from the ‘buy the rumor, sell the news’ theorem, the market has already priced in a significant premium to the Dollar owing to its policy adjustments to this point. To leverage further gains would require a faster pace of policy adjustment by the Fed than previously anticipated and/or a retreat back into aggressive dovish territory for its largest counterparts.


On similar terms of futures outlook, the ECB and BoE rate decisions will be monitored for any intention to alter pace from the open-ended, long-term deferment offered by both. The European authority is expected to re-evaluate its halved QE program in September while the UK group is hoping that inflation doesn’t further balloon to force their hand amid deep Brexit concerns.


Last and least is the SNB. The Swiss group is still struggling to offset the ECB’s prolific policy efforts and attempt to regain credibility in the financial system. The latter struggle born from the January 2015 abrupt failure of its EUR/CHF floor is great evidence of why credibility matters when it comes to central banking.  

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