Last week saw the Fed deliver the expected 25bps rate hike but with a somewhat hawkish communique. After posting five consecutive record highs the prior week for the first time since April 2009, equity markets finished somewhat mixed last week while interest rates continued their march higher.

Last Week’s Market Anecdotes:

  • The Fed delivered a 25bps rate hike as expected but accompanied that with a pointed narrative about emerging risks of rekindled inflation and an increase in the projected number of rate hikes in 2017 from two to three (the dot plot). Both the U.S. dollar and interest rates climbed in response.
  • The BOE left rates unchanged last week, citing the renewed strength in the Pound and the tightening effects that will exert on their economy.
  • The U.S. yield curve (interest rates) shifted higher across the curve but was most pronounced in the front and belly ends of the curve. 2-year through 10-year rates rose 13-18 bps on the week. The 10-year Treasury yield hits its highest level since July 2015.
  • WSJ Dollar Index is at its highest closing value in more than 14 years. The U.S. dollar moved sharply against both the Euro and Yen. The Euro is at its lowest level against the dollar since 2003 while the yen weakened to its lowest mark since February.
  • The US 10-year TIPS breakeven rose to its highest level since September 2014.
  • Turmoil in Chinese markets is becoming pronounced. China halted trading in its 10year bond futures after it crashed a record 2%, the biggest daily drop in history. Chinese also extended emergency loans to domestic financial firms to avert a liquidity crunch.
  • The financial media became very preoccupied with Dow 20,000 last week, but another much more important “20” milestone was crossed in the background – the S&P 500 hit $20 trillion in market capitalization. That is quite a long way from the $6.1t market cap, where it bottomed out in April 2009. • Health Care (XLV) and Utilities (XLU) were both up last week , bucking their underperformance since the election, while Materials (XLB), Industrials (XLI), Consumer Discretionary (XLY), and Financials (XLF) all gave up some of their recent outperformance.
  • Fresh political uncertainty in Italy prompted the ECB to reject Monte Paschi’s request for an extension to January 20th to complete their plan to raise rescue financing. Meanwhile, Italy’s biggest bank, Unicredit, announced plans to raise $13.8 billion in a rights offering. The bank plans to shed an additional 6,500 jobs and €1.7b in cost cuts.

Last Week’s Economic Anecdotes:

  • Retail sales, Industrial production, and capacity utilization all missed their marks last week. November retail sales missed and October was revised downward.
  • Last week provided both CPI and PPI inflation readings. CPI came in as expected (core and headline) registering 2.1% and 1.7% respectively. PPI was a bit stronger than expected with core PPI trending at 1.6% annually.
  • November housing starts declined 18.7% to 1.090m (1.23m were expected).
  • The Philly Fed manufacturing index and the Empire Manufacturing Activity index both jumped (21.5 from 7.6 and 9 from 1.5). The regional indexes reflected significantly improved forward expectations of activity.