Months of speculation and nerve-wracking hearsay about the timeline of the second rate hike in almost a decade finally ended yesterday, thankfully causing no shock or surprise. As widely expected, the Fed raised the benchmark interest rates by a modest 25 bps to 0.50–0.75%, confirming the U.S. economy’s growth momentum and the labor market’s wellbeing, though both still have miles to go.
The step also sets the U.S. apart from other developed economies and had a great impact on the global currency market. The Fed has now forecast
three rate hikes in 2017, up from two guided in September but kept the projection of three hikes each in 2018 and 2019, unchanged.
Muted inflation mainly due to stubbornly low oil prices has been an issue for long for the Fed. But lately, the scenario improved with signs of recovery in the oil patch and President-elect Trump’s pledges for fiscal reflation. The core PCE Inflation rate grew 1.7% annually in October (still short of the Fed’s target of 2%).
The best part is that unemployment fell to a nine-year low of
4.6% in November. Wages rose 2.5% last month on an annual basis but slipped sequentially. More importantly, the Fed did not move an inch from the ‘ gradual’ rate hike trajectory.
Also, the central bank indicated that the Fed’s future focus would be on how Trump’s policies shape up, so that it can plan the monetary policy accordingly. It has also put stress on still-lukewarm business spending though household spending has improved modestly.
bumped up its 2016 median projection for personal consumer expenditure inflation to 1.5% from 1.3% guided in September. The projections for 2017, 2018 and 2019, however, stayed the same at 1.9%, 2.0% and 2.0%, respectively.
The median expectations for 2016, 2017 and 2019 real GDP growth have been ticked up to 1.9% from 1.8% guided in September, to 2.1% from 2.0% and to 1.9% from 1.8%, respectively. However, the median real GDP growth expectation for 2018 is unchanged at 2.0%.
As already discussed, unemployment was the true healer. The coming years will also see the same upbeat trend as estimates for 2016, 2017 and 2019 were lowered from 4.8% to 4.7%, 4.6% to 4.5% and 4.6% to 4.5%, respectively, while the same for 2018 remained the same at 4.5%.
The notable changes were in the projection for the benchmark interest rate for 2017, 2018 and 2019. Projections for 2017, 2018 and 2019 were ticked up from 1.1% to 1.4%, 1.9% to 2.1% and from 2.6% to 2.9%, respectively. These are meaningful jumps from the 2016 projected rate of 0.6%. Fed’s funds rate for the longer run was raised to 3% from 2.9%.
However, the move did not upset the market as the investing world was prepared for it well ahead of the meeting. The market is now focusing on a faster rate hike trail in the coming year though Trump’s policies and inflationary expectations will basically decide how fast or slow the Fed can actually act.
However, bonds obeyed the rule book and started diving as soon as the Fed enacted a hike. The two-year benchmark Treasury yield jumped 10 bps from the day earlier to 1.27% on December 14, marking a
The yield on the 10-year Treasury note rose 6 bps to 2.54% but yield on the long-term 30-year bonds stayed the same at 3.14% on December 14. All bond ETFs were in the red.
Needless to say,
PowerShares DB US Dollar Bullish ETF (added about 1% on the day. On the other hand, all key U.S. equity ETFs including the S&P 500-based ( UUP Quick Quote UUP - Free Report) SPY Quick Quote SPY - Free Report) , Dow Jones based (and the Nasdaq-100 based ( DIA Quick Quote DIA - Free Report) QQQ Quick Quote QQQ - Free Report) lost about 0.8%, 0.6% and 0.2%, respectively (read: Can Dollar ETFs Stay Strong Going into 2017?).
Given this, we have highlighted a few ETF winners and losers from the Fed move:
ProShares High Yield—Interest Rate Hedged ( HYHG Quick Quote HYHG - Free Report) – Winner
Though bond ETFs were losers from the move, HYHG – which looks to track high yield bonds and has an interest rate hedge built into its strategy as it takes a duration-matched short position in U.S. Treasury futures – added about 0.8% on December 14 and also touched a 52-week high (read:
Hedged & Inverse Bond ETFs to the Rescue if Rates Rise). Highland/iBoxx Senior Loan ETF ( SNLN Quick Quote SNLN - Free Report) – Winner
Senior loans are issued by companies with below investment grade credit ratings. In order to make up for this high risk, senior loans normally have higher yields. Since these securities are senior to other forms of debt or equity, senior loans give protection to investors in any event of liquidation. As a result, SNLN which is yielding around 4.41% – higher than the benchmark yield – added about 0.1% on the day (read:
Fight Rising Yield with These High Yield ETFs). Barclays Inverse US Treasury Aggregate ETN ( TAPR Quick Quote TAPR - Free Report) – Winner
As yields surged, inverse bond exchange-traded products like TAPR soared. The product was up about 0.7% on the day (read:
ETFs in Focus on Rate Hike Hopes Following Fed Minutes). Market Vectors Gold Miners ETF( GDX Quick Quote GDX - Free Report) – Loser
As soon as the greenback gains, commodity prices fall.
SPDR Gold Shares ( GLD Quick Quote GLD - Free Report) tracking the gold bullion dropped about 1.5%. The largest big-cap gold mining ETF GDX plunged about 5.5% on the same day. GDX saw more losses as it often trades as a leveraged play on gold. iShares MSCI Emerging Markets ( EEM Quick Quote EEM - Free Report) – Loser
Fears of a cease in cheap dollar inflows hit this emerging market ETF hard. The product lost about 3% on December 14.
Utilities Select Sector SPDR ETF ( XLU Quick Quote XLU - Free Report) – Loser
The utility sector – which is high-yielding in nature – performs awfully in a rising rate environment. XLU thus shed about 2.1% on December 14.
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