US Federal Reserve raises interest rates, as analysts expected

by Bella Palmer

The US central bank on Wednesday raised its main policy rate by 25 basis points, as had been widely anticipated by economists.
Rate-setters in Washington DC hiked the range for the Fed funds rate to between 25 and 50 basis points – by unanimity – following a two-day meeting.

In its policy statement , the central bank emphasised that the pace of tightening going forward would be “gradual”.

“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run,” the FOMC said in its policy statement.

From the predictions for the level of interest rates submitted by the FOMC´s members, the Fed´s dot-plot graphs in market parlance, policy makers believed the appropriate rate at the end of 2016 would be 1.375%, the same as they had anticipated in September.

That implied four quarter-point increases in the target range next year, based on the median of the forecasts.

For 2017, the FOMC´s members were now projecting a median Fed funds rate of 2.4%, down from the 2.6% they were anticipating in September.

Policymakers lowered their forecast for core inflation in 2016 and 2017 – as measured by the personal consumption expenditures deflator – but also that for unemployment next year.

Dominic Rossi, Global CIO – Equities, Fidelity International, commented: “US consumers are entering 2016 stronger than in they have been in a decade. US consumption will easily be able to weather the expected modest interest rate  increases and the domestic economy may well turn out to post a surprisingly strong performance.

Pearson was the day’s big winner after Exane BNP Paribas upgraded the educational publisher’s stock to ‘outperform’ from ‘neutral’. “Risks of further earnings downgrades are real but seem discounted by an all-time low valuation. We are hopeful the new chairman will lead a profound refocussing of the group with better capital allocation.

Cyclical and structural headwinds should ease from 2017,” the bank said. Exane said Sydney Taurel brings with him a wealth of experience that will certainly please shareholders. His immediate task will be to restore credibility after the stock’s 45% plunge in the last six months and Exane is hopeful of seeing positive developments.

Investors were happy with Rolls-Royce splitting out its divisions and reshuffling its senior management team, in what it said is the first step in a “wide-ranging” restructuring programme. The company said the current top-level Aerospace and Land & Sea divisional structure will end, leaving the company’s five key divisions – Civil Aerospace, Defence Aerospace, Marine, Nuclear and Power Systems – reporting directly to new chief executive Warren East.

As a result top executives Tony Wood, who is President of Aerospace, and Lawrie Haynes, who is President of Land & Sea, will leave the company in 2016 after assisting with the transition. The company said the changes, including a reshuffling of senior management, will take effect on 1 January 2016 and should “clarify executive accountabilities, intensify leadership focus on operational performance and allow Rolls-Royce to build on its world class engineering capabilities”.

Tills were ringing at Dixons Carphone in 2015, as the multinational reported its first set of half yearly results since its creation. The electronics and travel retailer saw like-for-like revenue rise 5% over the period, to £4.39bn. Its proforma headline profit before tax was also up, 23% to $121m, with statutory profit before tax £78m from its continuing operations.

In the report, Dixons Carphone said it had improved its market share across the UK and Ireland, Nordics, Greece and Spain markets. “Against a broadly flat market overall and a very strong competitive period, we have seen continued like-for-like growth driven by market share gains across all territories”, said group chief executive Sebastian James.

Sport Direct International shares prices fell on the fallout over its staff’s pay and working conditions. An investigation in The Guardian last week claimed thousands of Sports Direct workers were receiving effective hourly rates of pay below the minimum wage, as well as being subject to daily searches, being harangued via tannoy to hit targets, and a ‘six strikes and you’re out’ regime.

This week the retailer was rounded on by MPs during an urgent parliamentary debate and the company was deserted by some of its leading City cheerleaders. Former shadow business  minister, Chuka Umunna, branded the retailer as “a bad advert for British business” and said it had “a culture of fear in the workplace that we would not wish to see repeated elsewhere”.

Mondi shares were rebalanced after a substantial rise on Tuesday. It followed news that the paper and packaging company terminated its agreement to buy two of Walki Group’s extrusion coatings plants in Finland and Poland due to European Commission competition concerns.Mondi said the two companies, which announced the agreement in May, have been in discussions with the EC about ways to alleviate concerns related to the impact on the competitive environment.

“However, no workable solution suitable for all parties has been found and therefore Walki and Mondi have decided to withdraw the application to the Commission and terminate the acquisition agreement.” Mondi said extrusion coatings remain a core part of its business and product portfolio and it will continue to operate its extrusion coatings division as before “to the benefit of its customers  and other stakeholders”.

European stocks rose in choppy trade as investors kept to the sidelines ahead of the US Federal Reserve´s interest rate decision.

By the close of trading, the benchmark DJ Stoxx Europe 600 was 0.24% higher to 360.43, France’s CAC 40 up by 0.22% to 4,624.67 and Germany’s DAX by another 0.18% to 10,469.26.

If the Federal Reserve goes ahead and raises rates as widely expected, it will be the first major central bank to do so since the financial crisis of 2008.

“The FOMC’s intentions have been telegraphed for a while now and a hike is an almost certain outcome,” said Societe Generale.

“We expect the FOMC to emphasise that the subsequent hikes will be data dependent and gradual. Chair Yellen is likely to tie gradualism to both cyclical and the slow-moving structural forces, namely low inflation and a low neutral real rate. Reinforcing this message, we also expect the FOMC’s estimate of the longer-run fed funds rate to decline from 3.5% to 3.25%.”

SocGen said efforts will especially be placed on communication this time around, as the Fed will need to carefully harmonise market expectations with its own forecasts.

“As we saw with the ECB, it is easy to disappoint, so the communiqué, press conference, and Summary of Economic Projections will have a key role to play,” the bank said, adding that it expects Yellen to strike the right balance.

In corporate  news, Casino surged after the French supermarket operator announced debt-reduction plans. As part of the plans, the company will sell some of its real estate in Thailand and Colombia, as it looks to reduce debt by more than €2bn next year.

Elsewhere, educational publisher Pearson was in the black after Exane upped its stance on the stock to ‘outperform’ from ‘neutral’, but miner Anglo American slid after Societe Generale downgraded it to ‘sell’ from ‘hold’, saying things could get worse before they get better.

On the macroeconomic front, investors digested a couple of data releases.

Markit’s survey of manufacturing in the Eurozone showed activity rose to a 20-month high in December.

The flash services PMI activity index fell to 53.9 from 54.2, which was a three-month low, but the manufacturing PMI rose to a 20-month high of 53.1 from 52.8 in November.

Markit’s flash Eurozone PMI composite output index slipped to 54.0 in December from 54.2 the previous month, marking a two-month low but still well above the 50 threshold that separate expansion from contraction.

The flash Eurozone manufacturing PMI output index nudged up to 54.4 from 54.

Chris Williamson, chief economist at Markit, said: “The Eurozone economy enjoyed a comfortably solid end to 2015, though policymakers are likely to remain disappointed by the relatively modest pace of expansion and lack of inflationary pressures, given the stage of the recovery and the amount of stimulus already in place.

Elsewhere, the final reading on Eurozone inflation for November revealed consumer prices rose 0.2% in November, up from an initial estimate of 0.1%.

Oil futures continued to struggle on Wednesday as persistent oversupply meant bearish sentiment remained embedded in the market, while the Brent and WTI spread narrowed in intraday calls.

At 1645 GMT, the Brent front-month futures contract was down 3.25% or $1.25 to $37.20 per barrel, while WTI was down 4.34% or $1.62 at $35.73 per barrel, as a relatively stronger dollar piled further pressure on both benchmarks.

Furthermore, the Brent-WTI spread fell below a dollar earlier in the session with both contracts lurking either side of $37-level, before the WTI retreated sharply on US inventory data.

According to the Energy Information Administration, the US Department of Energy’s statistical arm, the country’s commercial oil inventories rose by 4.8m barrels over the five days ending on 11 December to reach 490.7m.

Jasper Lawler, analyst at CMC Markets, said, “The spread between Brent crude and WTI had tightened after the US congress moved towards an agreement to lift the ban on US oil exports which has been in place since 1973, but widened again as both contracts fell following inventory data pointing to the biggest build up in 22 years.”

“US oil exports are not likely to affect overall market prices but would mean US and global producers selling into the same markets. Global producers including Russia and OPEC countries might have to cut prices to compete with US shale producers should it happen.”

Elsewhere, selected base metals saw marginally positive trading on the London Metal Exchange. At 1635 GMT, the three-month copper delivery futures contract registered a 0.5% uptick to $4,592.50 per metric tonne, still within range of six-year lows.

Concurrently, primary aluminium (up 1.2%), nickel (up 1.0%) and tin (up 0.9%) contracts headed higher, but zinc (down 0.7%) and lead (down 2.3%) headed lower.

Liz Grant, senior account executive at Sucden Financial, said, “Ahead of the Fed decision, the dollar edged higher and markets were jumpy.

Turnover on the LME was particularly thin and price ranges were narrow. Copper was once again trading either side of $4,600 while the large stock increase reported in lead, which coincides with third Wednesday settlements, drove the price back below $1,700.”

However, the precious metals market posted an uptick on the expectation of a dovish tone from the US Federal Reserve. COMEX gold futures rose 1.26% or $13.40 to $1,075.00 an ounce, while spot gold was 1.29% or $13.68 higher at $1,074.90 an ounce. COMEX silver futures rallied 2.87% or 40 cents higher to $14.17 an ounce, while spot platinum rose 2.23% or $19.08 to $874.48 an ounce.

Finally, headline agricultural commodity futures were on a negative patch in early trading stateside. CBOT corn (down 1.66%), wheat (down 1.72%), ICE cocoa (down 1.35%), cotton (down 0.19%) and CME live cattle (down 0.72%) futures were all trading lower.

This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

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