Janet delivers, equities celebrate initially, bonds unmoved

Equity markets around the globe initially toasted the much-anticipated rise in US interest rates, the first in almost a decade. The Federal Reserve also celebrated the end to what Janet Yellen described as an extraordinary seven-year period. Janet Yellen appeared to give a rosy picture of the US economy. One where interest rates would remain close to historic lows, despite yesterday’s move, and an economy that is growing modestly. She described the US economy having shown considerable strength in the past few years, possibly a slight exaggeration, but it is true to say that the size of the US economy is roughly 20% larger than it was seven years ago. Unlike the UK economy, which is now only reaching the size it was in 2007.

Economic data will now become of more significance in the coming months. Although this is a small move, any further signs of weakness in the US economy, a falloff in employment, weakening inflation data or weak ISM readings will probably cause analysts to put this decision into question. The last thing the Fed will want to do is to be forced to reverse this decision in the coming months.

The Federal Reserve based part of their decision to make this move on improving housing data, apparently discounting recent weaker than expected manufacturing and industrial production reports. Equity markets may have celebrated the move, bond markets took it very much in their stride as yields on two and ten year treasuries remained largely unchanged. Likewise the impact on the US dollar had largely been discounted, the dollar index rose modestly however remaining below the 100 mark.

Much of the comment in the UK news reports this morning, surrounded whether this move will encourage the Bank of England to bring forward the date when they will follow suit. If the gilt market is any indication yields fell today suggesting that the market does not expect any change in the Bank’s policy in the near future.

US equity markets gave up a lot of Wednesday’s rise on Thursday, however the Vix index remained below 20. Christmas is often a good time for equity markets, and once again the S&P 500 bounced off the 2000 level earlier this week. According to one technical analyst the S&P 500 index is close to a golden cross. This is a term used to describe when the 50-day moving average in the index rises above the 200-day average, another positive for technical analysts.

The oil price did not partake in the celebrations after a report that US oil inventories have increased more than expected. However one country, China, appears to be taking advantage of the lower price announcing they have doubled their strategic reserves in the past year.

High yield credit has been in focus in the past week, as prices of riskier bonds have been falling. A lot of the weakness is in energy related high yield on fears that banks have been lending to projects whose economics work on higher oil prices. High yield index has stabilised in the past days but equity markets may continue to look for that market to recover for it to gain confidence. 

Posted on December 17, 2015 .