- Fed raises rates as expected but maintains moderate outlook;
- Dutch election a success but not an excuse for complacency;
- BoE decision and US economic data still to come.
It’s been a strong start to trading on Thursday, with investors buoyed by the election result in the Netherlands and the optimistic yet cautious rate hike and assessment from the Federal Reserve on Wednesday.
In raising interest rates by 25 basis points – as they strongly hinted they would ahead of the decision – and sticking to their forecasts of three rate hikes this year, the Fed appeared to tick every box. The rate hike shows confidence in the economy and by resisting any urge they may have had to raise expectations, to say four hikes this year, as some anticipated, they’ve kept investors onside and not raised concerns about the risk of raising too quickly.
In essence, the Fed has struck a good balance and investors are clearly on board. With this outcome fully priced in though we have seen some profit taking on pre-Fed positioning which has weighed on the US dollar in the near term, while US Treasuries have slipped slightly and commodities including Gold have been given a boost.
The result of the Dutch election appears to have filled people with a huge sense of relief, with the populist wave that has seen the UK vote to leave the EU and the US elect Donald Trump having stumbled at the euro hurdle. It would appear that lessons may have been learned from the two votes last year and people turned out in large numbers to ensure that the rot stops here.
But are we just luring ourselves into a false sense of security? Geert Wilders support in the Netherlands was never even close to that of Brexit in the UK or Trump in the US and the fact is that his party still achieved the second highest number of seats and closed the gap dramatically compared to the last election, with Labor being decimated this time around. People may want to celebrate the result now but as we saw in the UK, Wilders is playing the long game and support is growing. If the eurozone doesn’t address the very issues that are driving people to support him, they may not be so lucky next time around.
The situation in France was always a much bigger risk, with support for Marine Le Pen being far greater than Wilders – possibly aided by her less extreme views in some areas. While we may see greater voter turnout than normal from those wanting to block Le Pen, as appears to have been the case in the Netherlands, it’s far too soon to declare victory. Le Pen is still a serious candidate and will likely use the Dutch election to rally her supporters to head to the polls in droves and make their voices heard to those in Brussels that prefer to bury their head in the sand.
Two of this week’s main events may be out of the way but things are unlikely to ease up, with the Bank of England becoming the third central bank to announce its latest monetary policy decision today. While no change is expected, attention will be drawn to the minutes after reports yesterday that they could consider raising interest rates next month, a scenario that seems extraordinarily unlikely at this moment. There’s also plenty of US economic data still to come including building permits, Philly Fed manufacturing index, jobless claims, housing starts and JOLTS job openings.
