Hints of U.S. rate hike give world markets a welcome boost

Your financial and economic news for December 18


What a difference a change of wording can make. Following the U.S. Federal Reserve’s statement yesterday – widely believed to have signalled an expected rate hike within the first half of next year – markets are rallying around the world.


The Day Ahead

The TSX had a blockbuster day – marking the biggest single-day gain in three years, closing up more than 350 points. The jump comes a day after a respectable 150 push on Tuesday, marking the second day of triple-digit gains. U.S. exchanges also pushed up on the fed’s quarterly announcement, with the S&P 500 finishing on its best day in a year.
The Asian markets have had a strong day today, with the Japanese Nikkei 225 in particular getting a push from the Fed’s statement, while Sydney was soothed by gains in the price of oil. European markets also started the day up.

The loonie closed lower – on a stronger U.S. dollar. The Canadian dollar closed at 85.92 to the greenback, 0.02 cents lower from the previous day, after the dollar rose on the Fed’s statement.

Oil also got a bit of a boost yesterday – pushing markets and giving a touch of stability to the Russian ruble, as Brent crude settled above US$60, while WTI perched above $55 after dropping below the mark earlier this week. Around 4 a.m. Toronto time, WTI had dropped slightly to US$56.37 while Brent was at US$61.25.

Employment Insurance numbers today, retail and inflation numbers tomorrow. Statistics Canada will release numbers today on how many people were receiving Employment Insurance in October, after largely unchanged numbers between the previous two months. There were just under half a million people on EI in September. Tomorrow, numbers are out for the consumer price index and for retail trade.

The Japanese central bank meets today, less than a week after an election that kept Prime Minister Shinzo Abe – and his “Abenomics” plan to fight deflation – in power. But while inflation looked healthy in the spring, oil has fallen and Japan has dropped back into recession, leaving questions of how low inflation may have fallen, and what the Bank’s response will be.

The European heads of state meet today in Brussels – and one of the plans they’re expected to vote on is a €21-billion scheme to prod foreign investment. The “European Fund”, expected to attract €315-billion in funding in the next two years, is another effort to spur growth as the eurozone flirts with deflation. David Cameron, as well as other EU leaders, will also be pushing to get a U.S.-EU trade deal back on track.


What You Missed

So far, the ruble is faring better today, as the price of oil pushes slightly upward and the country awaits the annual statement from President Vladimir Putin, which is expected to address the ruble’s fall. The Russian currency has been on a wild ride in recent days, even after emergency rate hikes, rapidly losing value and then regaining some of the losses – yesterday it gained back 12 per cent of its value against the U.S. dollar.

Will there be a rate hike next year? This is the question on everyone’s minds after yesterday’s final quarterly update from the Fed changed the wording on the timing of an interest rate increase. The Fed said they can be “patient” in beginning rate increases, a significant change from the “considerable time” wording that the U.S. central bank had been using since last year.
Chair Janet Yellen elaborated that any change wouldn’t be made until at least a couple of meetings into 2015, which would be in the spring. The change in wording, a sign of recognition that the American economy is recovering, fuelled markets in the U.S. yesterday and has pushed markets in Asia and Europe so far today.

The change comes after major gains in job creation in the U.S., but notably, amidst information of slowing inflation: right before the announcement, new inflation data indicated the rate of inflation had fallen slightly last month, down to the lowest since February. Inflation is currently at 1.3 per cent, below the Fed target of 2 per cent. The wording suggested the labour market, not inflation, would push a rate hike, as the new forecast for unemployment was revised downwards. The growth forecast was left unchanged.

Meanwhile, the U.S. has pledged to restore relations with Cuba – and the economic shortfall will probably benefit the island nation the most. The country has long had to step around the U.S. when doing business internationally and small businesses have endured lengthy waits for expensive supplies, as moves toward private enterprise on the island have increased.

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