Markets digest Fed minutes and a hat trick of strong PMI 8217 s

Equity markets traded flat at the open on Thursday as investors digest the minutes from the Federal Reserve meeting in December and ahead of key economic releases throughout the day.

The minutes released by the Fed after the close in Eurorpe on Wednesday offered some points for investors to get their teeth into and gave further insight into the position of the FOMC and its policy maker members as we head into the year when wild card Trump takes Presidency.

The Fed had raised rates at the December meeting and we already knew that the intention is for a multiple rate rises throughout 2017; however, a big takeaway from these minutes was that there is still significant uncertainty surrounding the year ahead and Trump’s fiscal expansion policies that could be implemented and the effects on the outlook for growth, interest rates and inflation. The US economy looks to be entering a new phase of faster growth and the Fed are unsure how quantify this change and exactly how to address it.

Caution remains on lack of clarity

Trumps planned tax cuts and spending could increase the pace of rate hikes over the course of the year, as fears of the economy overheating become more relevant. However, given the lack of clarity surrounding any policies, the policy makers remained fairly cautious, with only half of members actually factoring in fiscal stimulus into their forecasts. Some policy members also raised concerns over the strength of the dollar, which finished the year up 4%. However, given the uncertainties the FOMC reiterated that for the time being a gradual pace of hikes was still the most appropriate, basically until more information on Trumponomics becomes available.

Market reaction

The market reaction was fairly muted and the dollar continued to pair gains, implying that investors may have expected a little more on upside risks from the Fed. However, we must not ignore the dollar rally over the past two months so investors could also be viewing this as an opportunity to take some profit off the table. In turn the pull back in the dollar is providing some relief for other currencies, with euro parity drifting further into the distance and the yen looking to find its feet once more. Finally, gold is seen regaining some ground on the weaker dollar pushing it to 4 week highs. A move above $1180 could open the door to December’s recent high of $1195 then onto $1200.

Services PMI smashes expectations

December’s service PMI smashed expectations at 56.2 versus an estimate of 54.7 making it a hat-trick of impressive PMI’s for the last month of 2016. December’s manufacturing PMI and construction PMI figures released earlier this week surpassed expectations, providing some of the best numbers in months. However, the service PMI is the one to watch and is arguably the most important of the PMI’s with biggest potential to move sterling, given the dominance of the service sector in the UK economy.

With 3 strong PMI’s under our belt the UK clearly ended 2016 on a strong footing. Given the uncertainties that lie ahead, with Article 50 set to be triggered in just three months, this picture could change quite quickly; however, at least there appear to be strong foundations on which we can rebuild our economy outside of the European Union.

Sterling, which had been trading lower ahead of the data release has received a leg up although is still sat in negative territory versus the dollar.

EIA Inventory data eyed after API’s upside surprise

Heading into the afternoon, oil will once again be in focus. After several volatile sessions since the OPEC led deal on cutting oil production kicked in, at the beginning of the year, sentiment remains underpinned.  Iraq has joined the list of countries complying with the cuts, ongoing weakness in the dollar is also offering support and the recent API crude oil inventories showed a decline of 7.4 million barrels over the previous week, a much larger drawdown that anticipated.  A print from the EIA inventories today in line with the API figure of 7.4 million barrels could provide an upside catalyst to WTi and Brent.