Daily Market Color

Fed Minutes Display Concern in Expansionary Fiscal Policies

Fiscal Uncertainty Recognized in FOMC Minutes  Minutes from the Federal Open Market Committee’s December policy meeting were released today, detailing the decision-making that led to an increase in the benchmark lending rate for only the second time since the 2008 financial crisis.  Distinctly noted in the minutes was the growing concern over “considerable uncertainty about the timing, size and composition of any future fiscal and other economic policy initiatives as well as about how those policies might affect aggregate demand and supply.”  About half of the committee members reportedly incorporated assumptions for expansionary fiscal policy into their analysis, citing the possibility for the need to expedite rate-hikes in order to curb higher inflation.  Other Fed officials remained dovish, emphasizing the negative effects that could be brought on by the post-election appreciation in the US dollar, which has jumped almost 6.5% since November 8th.  Overall sentiment among the committee pointed towards a plan for “gradual” hikes over the next few years, but almost all recognized that “the upside risks to their forecasts for economic growth had increased” following the election.

European Inflation Growth Seen at Fastest in Three Years
Headline inflation for the euro area exceeded expectations in the month of December, rising 1.1% YoY and significantly improving from November’s 0.6% rise.  The largest jumps were seen in Germany and Spain, with Germany logging its steepest monthly rise on record (+1%).  While outlooks for European consumer prices over the next 12 months have brightened considerably, many analysts feel that this past month’s statistics prove a reduced risk of deflation rather than increased chances of rising inflation.  With core inflation at 0.9% for the month, only 0.3% over its all-time low, the effect of rising oil prices and a depreciating euro has been pointed to as the potential driver behind the December figure.  Brent crude oil rose over 12% last month while the euro was down nearly seven percent against the dollar last quarter.  Overall expectations for inflation in the euro area currently reside at 1.8%, just below the ECB’s target of 2%.

All three major US stock indices gained 0.3%-0.9% on the day, while Treasury yields/swap rates fell 1-3 basis points across the curve with the yield on the 10-year note fading just below 2.4%.  Crude oil prices rebounded in today’s session on expectations of a reduction in US inventories.  Both WTI and Brent crude prices added more than 1.75% today, increasing to $53.25/barrel and $56.45/barrel, respectively.    

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