December Rate Hike Speculation Climbs Further

In another sign that last week’s momentum higher in risk assets is set for continuation, the strength in US dollar and equities has endured since the weekly market reopening.  The tailwinds for the US dollar and equities are partially attributed to the increasing likelihood of a rate hike from the Federal Reserve in December.  According to closing prices from Friday, Fed Funds futures, which track the probability of policy actions, signaled an 81.10% chance of a 0.25% step higher in rates from the current 0.50% to 0.75%.  The other driver of momentum has been Trump’s ambitious fiscal plans which include greater infrastructure stimulus and tax cuts for individuals and corporations that are expected to directly benefit economic activity and inflation.  EURUSD remains under pressure as European policymakers react to the election results with panic after calling an EU emergency meeting over the weekend.

As the US dollar climbs to a 9-month high, the Yuan continues to fall, reaching the lowest level versus the US currency in 7-years as the People’s Bank of China responds to tepid growth with intervention in exchange rates.  Despite lingering concerns about the pace of economic activity on the mainland, industrial production managed to stay firmly in growth territory, printing at 6.10% during October and matching September’s figures.  Along with retail sales which decelerated to 10.00% growth year over year through October from the 10.70% reported a month ago, there was some cautiousness towards the outlook.  While upgraded fixed asset investment was a silver lining, the latest data underlines the challenges facing Chinese officials as they attempt to mix highly accommodative monetary policy with more fiscal stimulus to keep growth elevated.