Weekly Wrap Dec 19: BoJ rate decision.

The point when good news is good news becomes good news is bad news is a fickle one.

Macro:

As expected the Fed raised rates by 0.25%. At the same time, the dot plot was updated to indicate an expected 3 rate hikes in 2017. Inflation expectations of the Fed were upgraded. In the meantime, consumers took a rest with retail sales flat for the month.

In China, industrial production was solid and retail sales were strong while FAI slowed, developments which were well in keeping with the policy intentions of the government. Total Social Financing and RMB loans have been growing quickly, and is responsible for concerns about the growing credit bubble in China. Meanwhile, M2 growth lagged, weighed down by continued capital outflows.

On the subject of Chinese capital outflows, the combined measure of onshore RMB and offshore CNH flows, signalled an acceleration over previous months.

Equities:

Equities are beginning to converge to fundamental factors with Europe and Japan outperforming, a flat return in the US and emerging markets underperforming.

Bonds:

The FOMC rate decision was uncontroversial but the revised dot plots, indicative of the Fed’s expectations for future rate action was revised to reflect 3 rate hikes in 2017. USD duration sold off substantially on the news.

EUR duration which had sold off the week before rallied on the ECB’s extension of QE to the end of 2017. Bond yields were uniformly lower across the Eurozone.

With the FOMC last week and the ECB the week before, bond markets were dominated by duration with credit spreads tightening to compensate.

Our preferred sectors of non-agency RMBS, leverage loans and bank capital securities all turned in a positive performance.

Going forward we are optimistic about the outlook for credit but maintain a duration hedged stance as we expect volatile sovereign bond markets.

FX:

The strength in USD has become boringly consistent and is supported by inflation expectations, trade flows, interest rate differentials and policy divergence. This is a long term durable theme.

Commodities:

We maintain our bullish call on oil based, first on capacity constraints but now also on strategic considerations about the Saudi’s intentions to float Aramco.

Additionally, we are bullish on MLPs based on President Elect Trump’s stated energy policy.

Week ahead:

Dec 19