Managing the US bubble
By Yann Quelenn
It was as predictable as the sunrise: the US Federal Reserve increased the prime rate yesterday to 1.25-1.50%. This was the third hike of 2017, and three more are generally predicted for 2018 – but we doubt next year will see a triplet of raises.
The Fed is promising rate hikes to bolster the US dollar. Stronger inflation is needed to kill excess debt without bursting bubbles – and there are bubbles now in almost every US asset class. We believe inflation is higher than what the Fed says: 3% versus 2%. Otherwise, the US economy is strong. Unemployment rate should drop below 4% in 2018, and the Fed forecasts GDP growth of 2.1%.
We remain bullish on the Eurodollar, although the USD might still enjoy a Christmas Rally, in light of the Fed’s self-satisfied 2017 review.
Central banks – smoke but little fire
By Arnaud Masset
After the US Federal Reserve yesterday raised rates, other central banks will sound off today: Switzerland, Norway, Turkey and the Eurozone. As widely expected the Swiss National Bank didn’t change anything, and neither did Norges Bank, except the latter signalled it would start hiking autumn 2018. The krone surge 1.20% against the US dollar with USD/NOK sliding to 8.2265. EUR/NOK fell 1.30% to 9.72.
The Central Bank of the Republic of Turkey will not change rates either, but markets expect a boost in late liquidity lending by 1% to 13.25%, therefore charging Turkish banks more if they need to borrow just before the market close. The CBRT has the option not to provide any funding through its 1-week repurchase auction to local lenders, forcing them to borrow at a much higher rate through the late liquidity window. Both the European Central Bank and the Bank of England are holding their last meetings of the year. Both are expected to pass on any significant moves.