Thursday December 15 Daily Market Primer

US stocks dropped yesterday, after the market digested the Fed’s no-surprise 25 basis point increase in the target rate for the one and only rate hike of 2016.  This was an anti-climax, as market expectation was completely aligned with the Fed.  The rate of economic activity has been picking up, with Q3 growth over 3%, and we are looking at about 2 - 2 ½% growth for the full year.  The Fed has been very cautious, waiting a full 12 months since the last tightening.   The Fed hinted at a more aggressive pace next year, with the median dot plot predicting three increases in 2017, however as Carl pointed out, the mean dot plot was unchanged.  The dot plots have not been a good predictor of actual interest rate changes.  The Fed outlook for growth and inflation barely changed.  During the press conference, Janet Yellen took a “wait and see” attitude toward anticipated fiscal stimulus from the incoming administration.    The Fed did not make any changes to its balance sheet, which is about 5 times as large as before the beginning of the financial crisis.   Dr. Yellen also defended Dodd Frank regulation, indicated her intention to serve our her term as Fed chair, during the press conference.  The Fed has been extraordinarily cautious, and it could be another six months before the next move.

The Bank of England announced their decision to keep interest rates on hold and their corporate bond purchase program in place this morning, which was also no surprise.  The US short term rate is .25%.  Stocks in Asia followed the US down, with a 1.8% drop in Hong Kong, and stocks in Europe are mostly positive today.

	LAST	CHANGE	% CHANGE
DJIA	19,792.53	-118.68	-0.60%
Nasdaq	5,436.67	-27.16	-0.50%
S&P 500	2,253.28	-18.44	-0.81%
Russell 2000	1,356.02	-17.51	-1.27%
Global Dow	2,532.55	-25.45	-0.99%
Stoxx Europe 600	356.91	1.19	-0.03%
Nikkei 225	19,273.79	20.18	-0.03%
UK: FTSE 100	6,947.13	-2.06	-0.03%
CBOE Volatility	12.87	-0.32	-2.43%
Australia: S&P/ASX 200	5,538.60	-46.00	-0.82%
China: Shanghai Composite	3,117.68	-22.85	-0.73%
Hong Kong: Hang Seng	22,059.40	-397.22	-1.77%
Europe Dow	1,540.24	-28.00	-0.31%
India: S&P BSE Sensex	26,519.07	-83.77	-1.79%
France: CAC 40	4,794.05	24.81	0.52%
Germany: DAX	11,279.50	34.66	0.31%
Italy: FTSE MIB	18,724.90	118.58	0.64%
Spain: IBEX 35	9,270.70	52.30	0.57%
U.S. 3 Month	0.53	0/32
U.S. 2 Year	1.28	-0/32
U.S. 5 Year	2.095	-7/32
U.S. 10 Year	2.603	-7/32
U.S. 30 Year	3.176	4/32
Germany 2 Year	-0.768	-1/32
Germany 10 Year	0.369	-20/32
Crude Oil	50.56	-0.48	-0.94%
Brent Crude	53.78	-0.12	-0.22%
Natural Gas	3.508	-0.028	-0.79%
S&P GSCI	384.46	-3.11	-0.80%
E-mini S&P 500	2249.25	-2.75	-0.12%

US initial jobless claims are out at 254K, a little better than forecast and the lowest in three weeks.  Fox announced a deal to buy the rest of  European satellite TV company Sky for $14.6 billion.  This is the deal a that was derailed by the UK phone hacking scandal of 2011, so you have to admire the Murdoch family’s persistence.  Yahoo will have to change their name to Boohoo after announcing another hack that was twice as big as the first one they told us about, effecting 1 billion customers.   Verizon has to be having second thoughts about their offer to buy the company. 

Mr. Trump’s meetings top technology executives yesterday was positive, and he struck a conciliatory note, as most of them supported Hillary Clinton in the election.   I was also mistaken yesterday in saying that Amazon’s Jeff Bezos did not attend.

Here’s the news:

Fed hike

As expected, the Federal Open Markets Committee decided to increase rates by 25 basis points yesterday. The market reaction, which saw Bloomberg's Dollar Spot Index surge 1.1 percent by the end of the day, was driven by the Federal Reserve's updated dot-plot which is predicting a faster than previously expected rate of tightening next year. The yield on 10-year U.S. Treasuries reached more than 2.6 percent this morning as futures show a greater than 50 percent chance of the next hike coming in May 2017. Gold was also hit, dropping to $1,137 an ounce by 5:07 a.m. ET., while the rising dollar put emerging market assets on the defensive.

BOE, SNB and Norges Bank

At 7:00 a.m. ET the Bank of England will announce its latest monetary policy decision. While expectations are for no change to rates or the size of the asset-purchase facility, investors will be looking for signs of increasing pressure from inflation hawks on the Monetary Policy Committee. Ahead of that announcement, retail sales in the U.K. unexpectedly increased 0.2 percent in November, the Office for National Statistics said. The Swiss National Bank maintained an unchanged policy stance, also as expected, while warning of a "multitude of political uncertainties" in Europe in 2017. Norway's central bank also maintained rates, surprising markets by not lowering its rate outlook and sparking a surge in the krone this morning.

China's bad week

If you're an investor in Chinese equities, bonds or currency, you've had a bad week. Overnight the yield on the country's 10-year sovereign debt surged by 22 basis points, the most on record, while the Hang Seng China Enterprises Index slumped 2.3 percent. Risks are seen to be mounting in the economy as November saw a surprise jump in shadow-banking activity.

Markets mixed

Overnight, the MSCI Asia Pacific Index dropped 1.6 percent, the most since Nov. 9, while Japan's Topix index ended the session 0.3 percent higher as the yen dropped below 118 to the dollar, a 10-month low. In Europe, the Stoxx 600 Index was 0.3 percent higher at 5:22 a.m. ET, with banks leading gains. S&P 500 futures added 0.2 percent.

Coming up...

Already this morning euro-area PMIs showed resilience, with December's composite reading matching November's 53.9. In the U.S. today, there is CPI, initial jobless claims, the current account balance, and Empire manufacturing data all due at 8:30 a.m. ET. Markit U.S. Manufacturing PMI is set to be published at 9:45 a.m. The Fed sees 3 rate hikes in 2017. The Fed hiked its key interest rate by 25 basis points to a range of 0.50% to 0.75% at Wednesday's meeting and upgraded its forecast to three rate hikes in 2017 versus its prior forecast of two. Bond markets everywhere are getting crushed. Post-Fed selling has run the US 10-year yield up about 20 basis points to 2.62%, its highest level since June 2014. Selling in Europe is having the biggest impact on the UK 10-year, which trades up 14 bps at 1.52%. The US dollar is surging. The greenback trades higher by 0.9% against a basket of its peers as traders continue to pile in following Wednesday's rate hike. Of the majors, the dollar's gains are strongest against the Japanese yen, which trades down 1.2% at 118.39 per dollar, its weakest since February. Stock markets around the world trade mixed. Hong Kong's Hang Seng (-1.8%) lagged overnight and France's CAC (+0.9%) leads in Europe. The S&P 500 is on track to open higher by 0.1% near 2,256. Markets are betting the next Fed rate hike could happen by mid-2017. World Interest Rate Probability data provided by Bloomberg shows a 16.6% chance the Fed hikes 25 bps at its February meeting and a 50.2% probability that a 25-bp hike happens by May. The Bank of England holds. The BOE held its key interest rate at 0.25% as expected and said a slowdown in growth was still likely despite the recent pickup in the economy. The British pound is weaker by 0.8% at 1.2459. Europe's PMIs were mixed. The Flash Eurozone PMI Composite Output Index held at 53.9 in December as manufacturing gained while the service sector slowed. German manufacturing led the way, posting a flash reading of 55.5, its strongest since January 2014. The euro is down 1.1% at 1.0417 versus the dollar and at its lowest level since January 2003. Yahoo revealed another huge hack. In what may be the biggest hack ever, the company says more than 1 billion accounts may have had phone numbers, birth dates, and security questions stolen by hackers during an attack that took place in August 2013. Earnings reports trickle out. Adobe Systems and Oracle will release their quarterly results after markets close. US economic data is heavy. Empire Manufacturing, initial jobless claims, CPI, and Philly Fed will all be released at 8:30 a.m. ET before Markit US Manufacturing PMI crosses the wires at 9:45 a.m. ET. Fed Push-Ups The Federal Reserve showed increasing optimism about the U.S. economy Wednesday and signaled interest rates would rise at a faster pace than previously projected as it unanimously approved its second rate increase in a decade. Officials said they would nudge up the federal-funds target rate by a quarter percentage point, to between 0.50% and 0.75%, pointing to a strengthening labor market nearing full employment and inflation moving more rapidly toward targeted levels. The Fed said it now expects to raise rates next year by another 0.75 percentage points, likely in three one-quarter-point moves. The change in tone put the brakes on a stock rally that had the Dow Jones Industrial Average heading for the 20000 level. Meanwhile, Fed Chairwoman Janet Yellen emphasized she would take a wait-and-see approach before deciding how to respond to Mr. Trump’s emerging economic agenda. A slow rise in rates would be in sync with Mr. Trump’s desire for growth and low unemployment, writes our Capital Account columnist Greg Ip. The morning after the rate move, the euro fell to a 13-year low against the dollar, trading at $1.043. Group Chat Mr. Trump struck a conciliatory tone at a much-anticipated meeting with Silicon Valley executives Wednesday, offering to work with them to foster innovation and support fairer trade deals. Part public spectacle, part private discussion, the 90-minute meeting in Trump Tower in New York marked the first time the president-elect met leaders of some of the nation’s most valuable companies, most of whom had supported Hillary Clinton during the campaign and several of whom were the targets of criticism from Mr. Trump. The executives at the meeting included Amazon CEO Jeff Bezos, Apple CEO Tim Cook, Facebook Chief Operating Officer Sheryl Sandberg, Tesla CEO Elon Musk, the CEO of Google parent Alphabet, Larry Page, and its chairman, Eric Schmidt, as well as the CEOs of Microsoft, Intel, IBM, Oracle, Cisco and Palantir. Billionaire investor Peter Thiel helped orchestrate the event. Sidelined in Syria The recapture of Aleppo by Syrian President Bashar al-Assad’s forces presents a stark example of Washington’s pullback in the Middle East as Russia and its partners have stepped in to drive events in the nearly six-year conflict, according to U.S., European and Arab officials. The Obama administration was sidelined as Russia and Turkey held negotiations this week to provide humanitarian relief for the inhabitants of the besieged northern Syrian city. The U.S., its allies and the U.N. have accused Syria and its allies of indiscriminately killing civilians in Aleppo; Syria and Russia say they kill terrorists, not civilians. Key players said they had agreed to a new cessation of hostilities in the city late Wednesday. Meanwhile, the top American commander in charge of the U.S.-led coalition targeting Islamic State said the U.S. will strike the group in Palmyra if Russian and Syrian government forces fail to act. Italy reportedly close to injecting capital into banks Gentiloni (Alberto Pizzoli/AFP/Getty Images) The Italian government, installed this week by Prime Minister Paolo Gentiloni, has drafted an emergency decree allowing the injection of government money into troubled financial institutions: Monte dei Paschi di Siena and three regional lenders. The Cabinet is expected to hold a meeting Friday about whether to implement the decree, a government source said. Reuters (14 Dec.),  Amplify debuts active ETF focused on income Amplify has brought to Bats Global Markets an exchange-traded fund designed to deliver income from dividend-paying stocks and sales of covered calls. The Amplify YieldShares CWP Dividend & Option Income ETF is actively managed by Capital Wealth Planning. ETF Trends (14 Dec.),  Bloomberg (14 Dec.)  No Brexit plan before Feb., Davis says The UK's Brexit secretary, David Davis, has told a House of Commons committee not to expect a Brexit plan until February, saying triggering Article 50 before the end of March would launch the country on a path "very difficult to revoke." "There is a viewpoint ... among some Europeans that we can't really mean this, that we can be persuaded to change our minds," Davis said. The Guardian (London)

The currencies to watch in 2017.

Here's one sign the world cares a lot less about monetary policy.

Europe's migrant flood is bringing Germany a much needed baby boom.

Russia overtakes China in a BofAML ranking of the top emerging markets.

What happens if you #DrainTheSwamp? Poland may have the answer.

The president of the Democratic Republic of Congo has very extensive business interests.

Drill 5,000 meters into a volcano. *Cross fingers*. Power!  Donald Trump’s Pledge to Loosen Regulations on Businesses Is a Heavy Lift Trump Children’s Expanded Roles Will Test Father’s Heavy Hand China Installs Weapons in South China Sea, Satellites Show Exxon Faces Dilemma on Rex Tillerson’s Pay Amazon Conducts First Commercial Drone Delivery Interest Rates Are Rising. Here’s Why Your Deposit Rate Isn’t. America’s Largest Pension Fund: A 7.5% Annual Return Is No Longer Realistic

In the long term, markets are driven by fundamentals. But in the short term, they're driven by memes. People repeat things until they acquire the characteristics of truth, even if the facts don't necessarily back them up. A good example would be all the times over the last year that people talked about how there wasn't inflation or wage growth despite plenty of evidence that there was. (For a good discussion about memes vs. facts when it comes to markets, check out the podcast Tracy Alloway and I did with Mark Cudmore, a former trader, and now a strategist with Bloomberg). In any case, very few people are now talking about a lack of inflation. Instead it's all about Trump and fiscal stimulus and future price increases that will arrive as a result. After yesterday's Federal Reserve decision, we might start to hear another story about how the central bank is finally exiting its post-crisis posture. On TV yesterday, Deutsche Bank's Torsten Slok said that he nearly "fell out of his chair" when Janet Yellen said that we might not currently need more fiscal stimulus to get the economy to full employment. What Yellen said makes sense of course; the unemployment rate is down to 4.6 percent already. But still, such things are jarring to hear. And with 10-year U.S. Treasury yields above 2.6 percent this morning it appears markets are jarred indeed.

Source: Bloomberg, BI, WSJ, CFAI Fin. Newsbrief, The Guardian, Reuters