QIC director of research and strategy Katrina King said markets have priced in a 100 per cent chance of a rate hike in the final 2016 meeting of the Federal Open Markets Committee (FOMC), but warned investors against writing it off as “a lacklustre meeting”.
“While we think it would be too early for the Fed to change any of their median forecast based on the changed political landscape, we do expect some acknowledgement or potential tilt to recognise the increased uncertainty and/or the potential upside for growth that a Trump presidency proposes,” she said.
Speaking to InvestorDaily, Ms King noted that market's were priced in line with the Fed dot plot – which tracks individual FOMC members' expectations for where interest rates should be – for the end of 2017 at around 1 per cent, but for 2018 the markets were priced at 1.6 per cent compared with the median dot's 1.8 per cent for the same year.
"The market is perhaps less upbeat on the economic outlook than the mean of the Fed dots for 2018," Ms King said.
"If the Fed continue to be very conservative in their outlook, and not raise the dots at this meeting and continue to hold them at around that level for 2018, then if the market starts to get more of a sense of the fiscal stimulus coming online, and starts to get more clarity from Trump around what that looks like, then it’s possible for the first time ever that you’ll start to get the market pricing higher than the forecast in the 2018 cash rate."
Ms King said this would imply the Fed was "behind the curve" and may need to increase the interest rate at a quicker pace than they're presently anticipating.
Additionally, Ms King said investors should watch for the US dollar’s reaction to the meeting, and while QIC’s “base case is not for it to spike higher and recast us into a repeat of first quarter 2016 recession fear”, it was a risk “worth watching”.
“This USD reaction vs the AUD will be key to watch – data here has been weaker recently, a softer AUD would be beneficial to our inflation path, however the rise in commodity prices and terms of trade is forcing a tug-of-war on the AUD which has yet to be resolved,” she said.
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