Risk Assets Rally Despite Geopolitical, Fed Uncertainty

 

Fed Sees Inflation Below Target, Increasing Uncertainty on Rate Hikes

The uncertainty about the pace of rate hikes next year remains after Federal Reserve Vice Chairman Richard Clarida suggested today that inflation may be running below the Fed’s target. The Vice Chair’s comments reveal the Federal Reserve’s desire to remain data dependent and non-committal as to future hikes, and signal a renewed effort to ween markets off the “forward guidance” that previous Fed leadership used to telegraph policy decisions. This apparent new Fed stance is likely to keep rates volatile going forward.

 

 

Equities Rally But Automakers Fall

The S&P 500 rose 0.33% in spite of escalating trade rhetoric from Washington and China. Health care, staples and utility sectors led the way higher. Amongst the laggards, both GM (-2.55%) and Ford (-1.28%) fell after President Trump suggested he may cancel GM’s subsidies on the back of the automaker’s plan to cut 14,800 US jobs.

 

 

Trade Resolution Further in Doubt

A resolution to the trade dispute with China is not likely to appear this week after Larry Kudlow, the President’s top economic advisor, said it was “highly unlikely” the US would halt a planned tariff increase on $200bn worth of Chinese goods. Investors will closely watch the meeting scheduled between the two nations at Friday’s G20 summit, with markets likely to move sharply if there’s any meaningful movement one way or the other in the current standoff.

 

 

Treasury / swap yields on the day ended the day mostly unchanged with the 10 year Treasury yield closing at 3.06%.  Oil prices were mixed on the day, while the Pound Sterling remained soft against most major currencies, down about a penny vs. the dollar to $1.2739.