Dec 13, 2016 - Story of the Week: Fed raising the rates by 50 bps tomorrow?

Hello mates,

So tomorrow is the big day, right? Well, still wondering what to really expect after few missteps from Yellen. Hike with dovish comments? No hike with hawkish comments? Or a surprise hike of 50 bps as the economy is growing and inflation pressures will kick in soon?

I believe we can all agree on a 25 bps hike that is already priced in by the market. The most important part will be the comments and guidance for 2017. Here, we are not likely to see dovish Yellen talking about 2-3 additional hikes next year even though Trump’s fiscal plans can support inflation expectations. We are also on the same page by saying Fed doesn’t have more or less any clear idea what to expect, what potential risks the economy might be coping with next year…etc.

What is a very strong signal proving that Fed is already behind the curve (we have expected Fed to raise rates in September) is the situation small and medium enterprises in US face. Actually, they already signal the shortage of qualified workers in some fields. As we move along, the economy is closing the output gap and the only question mark after OPEC/Non-OPEC countries agreed on crude oil production cuts is the level of capital investments. Still lacking a bit.

There is also another factor, apart from those we already discussed in The last big event in 2016 that we know about... and it is raising yields that may in turn support the banks, their profitability, improve risk models metrics and spur the lending activity to corporates as well as public.

Would you agree that it sounds like 50 bps hike tomorrow?

PS: Please keep in mind that the new US Government will likely look like a “US Inc.” sort of structure with all high profile and pro-business oriented people that will definitely push for more relaxed regulations and tax cuts.

Good luck Champs, let’s see tomorrow!

Mr Hawk

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