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FOMC Hiked Rates as Expected, Three More in 2018 Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Thu Dec 14 17 02:19 ET

FOMC, as expected, raised the policy rate, by +25 bps, to the 1.25-1.5% range in December. However, the decision was made with Neel Kashkari and Charles Evans (both are doves) dissenting. The fed also upgraded the economic outlook, raising GDP growth forecasts and lowering the unemployment rate for the next year. Inflation would likely stay below the +2% target for the coming year. Note that the Fed has incorporated the impacts of the tax reform bill in its forecasts. Meanwhile the median dot plot continued to project three rate hikes next year but just over two in 2019. US dollar fell across the board as the rate hike had been fully priced in, while other political and economic news did not bode well for the greenback. In the commodity market, oil prices remained under pressure despite a decline US crude inventory. The market was concerned over the relentless increase in US production and rising gasoline inventory. The front-month WTI crude oil contract slipped -0.95% while the Brent contract was down -1.42%. Meanwhile, the Nymex contracts for RBOB gasoline and heating oil also fell -3% and -1.51% respectively.

Oil Inventory

The US Energy Information Administration (EIA) shows that total crude oil and petroleum products stocks dropped -2.56 mmb to 1247.06 mmb in the week ended December 8. Crude oil inventory plunged -5.12 mmb to 442.99 mmb as stock declined in 4 out of 5 PADDs. PADD 2 inventory fell -3.22 mmb for the week whilst Cushing stock slipped -3.32 mmb to 52.24 mmb. Utilization rate slipped -0.4% to 93.4%. Meanwhile, crude production climbed further higher to 9.78M bpd for the week. For refined oil products, gasoline inventory jumped +5.66 mmb, following a +6.79 mmb addition in the prior week, to 226.55 mmb although demand added +2.2% to 9.09M bpd. Production rose +3.8% to 10.13M bpd while imports slipped-1.02% to 0.48M bpd during the week. Distillate inventory decreased -1.37 mmb to 128.08 mmb as demand jumped +17.21% to 4.38M bpd. Production dropped -2.87% to 5.25M bpd while imports added +2.76% to 0.15M bpd during the week.


Besides increasing the policy rate, the Fed staff also upgraded the economic outlook. As suggested in the Summary of Economic Projections, GDP growth forecast was revised higher to +2.5% in 2017, +2.5% in 2018 and +2.1% in 2019, from +2.4%, +2.1% and +2% respectively. The longer-term forecast stayed unchanged at +1.8%. Unemployment rate was revised lower to 4.1% in 2017, 3.9% in 2018 and 2019, and 4% in 2020, from 4.3%, 4.1% and 4.2%, respectively. The longer-term unemployment rate stayed unchanged at 4.6%. On inflation, the PCE inflation stayed unchanged all over the Fed's forecast horizon, at 1.9%, 2%, 2% and 2% in 2018, 2019, 2020 and the longer run respectively. On the monetary policy outlook, the median dot plot projects three rate hikes next year and just over two in 2019. The 2020 projection edged higher by almost 1 more increase, while most participants forecast the terminal rate to exceed the neutral rate.

Ahead of the FOMC announcement, the House and Senate leaders reportedly have agreed on the final version of the tax plan. The corporate tax rate would lower to 21%, compared with 20% preliminarily proposed. Yet, the reduction would take effect in 2018, compared with Senate's proposal of 2019. Meanwhile, the top income tax rate would fall to 35% from 39.5%. The final bill would be voted in the House and Senate next week. We expect the Republican would attempt to get the bill passed as soon as possible, in particular after its loss of a Senate seat in Alabama to the Democrat.


US headline CPI steadied at +2.2% y/y in November. While this came in line with expectations, the core reading surprisingly missed consensus (of +1.8%) and eased to +1.7% y/y, from +1.8% in October. Inflation outlook remained positive, though with both a three-month and six-month rate at +1.9%. Elsewhere in the UK, jobless claims surprisingly increased +5.9K in November, after a +1.1K addition a month ago. The market had anticipated a milder increase of +0.4K. Meanwhile, the Claimant count rate stayed unchanged at 2.3% for the month. the ILO unemployment rate steadied at 4.3% in the three months through October, higher than consensus of 4.2%. Average weekly earnings expanded +2.5% in the three months through October, in line with expectations and improving from the upwardly revised +2.3% growth in the prior period.

Released earlier in Asia session, China's November data surprised to the downside. Retail sales grew +10.2% y/y, higher than October's +10% but missing consensus of +10.3%. Industrial production expanded +6.1% y/y last month, compared with consensus of, and October's, +6.2%. Urban FAI grew +7.2% y/y in the first 11 months of the year, in line with expectation but moderating from +7.2% in the first 10 months of the year.


The highlights for the rest of the day are the meetings of the three European central banks (ECB, BOE and SNB). For the ECB, we do expect any new policy measure to come after the announcement of tapering at the previous meeting. Again the focus would be on the updated economic projections, in which we expect upward revisions on GDP growth and inflation forecasts. At the press conference, President Mario Draghi would inevitably face questions regarding internal division over settling QE end date. The split was revealed in the October meeting minutes which showed that a "few" members (possibly Weidmann, Galhau and Coeure) preferred to set a clear end-date instead of leaving QE open-ended, while some believed that the central bank should stop signaling that asset purchases will continue until there is a sustained improvement in the path for inflation. Rather, these members preferred some flexibility on the matter.

The BOE meeting would bring likely bring a unanimous decision to leave the policy rate unchanged, following the exceptional rate hike at the previous meeting. Another highlight in Europe would be Brexit negotiations. The SNB would continue to stand on the sideline but again reiterates the pledge to intervene on the FX market to fight against franc's appreciation.


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