Review and Outlook for the New Year

December was a record-breaking month for U.S. stock markets with the S&P 500, NASDAQ and Dow Jones Industrial Average hitting new all-time highs during the period. The so-called Trump rally was the result of post election euphoria and, in particular the prospect of lower personal and corporate income taxes.  This market advance has been led by stocks in the Financials and Industrials sectors in addition to Basic Materials and Energy companies stoked by an ongoing recovery in crude oil prices.

Despite having a limited number of economic data points, last month’s calendar was quite market-moving nevertheless. Sunday, December 4th kicked off the beginning of the trading month with the Italian referendum. The plebiscite resulted in a “No” vote on constitutional reform, forcing Prime Minister Matteo Renzi to resign and re-igniting populist concerns for the country’s possible emancipation from the European Union.

Then there was an announcement from the European Central Bank (ECB) on December 8th.  The governing council committed to inject more cash for longer into the Eurozone economy until the end of next year and beyond if needed. The expectation going into the meeting was for six months of stimulus in the form of quantitative easing (QE) at €80bn, while the actual result was nine months at €60bn.The greenback has since spiked sharply with extended gains to this higher than expected dovishness (total QE of €540 billion versus €480 billion before).

The most market-moving event last month, however, turned out to be the regular Federal Open Market Committee (FOMC) meeting. As expected, the Federal Reserve raised its target overnight rate by 0.25% after a unanimous, ten to zero vote. But more importantly, Fed Chair Janet Yellen’s speech was interpreted to be much more hawkish than she had been previously. The bond market was hit as rates rose across the curve. Forecasts provided in the announcement indicated that up to three rate hikes are expected for next year. This represents an increase from only two telegraphed in September’s meeting.

Another surprise came from the commodities sector. Last month, the Organization of Petroleum Exporting Countries (OPEC), a cartel consisting of 12 of the world’s major oil-exporting nations, agreed upon its first output cut since 2008 by way of a cooperative deal with non-members. This caused an immediate boost in crude prices with oil prices moving solidly above the critical $50 level. Longer term, we expect a deregulatory push in Washington to revive U.S. drilling, in the process, offsetting much of any OPEC cut.

Looking ahead, we start the New Year with the release of the FOMC minutes on Wednesday. On Friday, we’ll get a better read on the U.S. economy with the latest non-farm payroll employment report. Both events should provide a better indication of interest rate expectations for 2017.

In international central bank activity, we started last month with a meeting from the Bank of England on the 12th. As a result of political gridlock surrounding Brexit, Mark Carney and friends will most likely be unable to push back quantitative easing (QE) to combat inflationary pressure from the Pound’s massive devaluation. January 18th should see headlines from Canada’s central bank, on the 19th an announcement from the European Central Bank (ECB) and finally a statement from the Bank of Japan should surface on or around January 31st.

To our esteemed readers and clients, we wish you all a very happy and prosperous New Year!

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