In light of the US Federal Reserve’s ‘dot-plot projections’, an impending Bank of England’s Monetary Policy Committee meeting and the rumbling Italian budget situation this week, a City asset manager says the run-up to Christmas might well turn out to be a damp squib.
Looking ahead to the week, Jordan Sriharan, Senior Portfolio Manager at Thomas Miller Investment, said the eyes of the market will be firmly fixed on the final monetary policy meeting of the year over at the Fed.
"For the last three months, the probability of an interest rate rise on Wednesday (19 December) was equivalent to what Americans would term ‘a slam dunk’. Fast forward through a period of high volatility, geopolitical posturing and weaker economic data, and those odds have fallen. It is highly likely the Fed will raise interest rates by a quarter of a percentage point this week but that is, arguably, of less interest."
Sriharan says investors will be looking at the latest economic projections from the Fed and deciphering whether the US central bank has turned negative given the recent, less than positive, news flow.
“Of particular interest will be the “dot-plot projections” which are the collection of the FOMC’s forecast for interest rate rises over the next three years. Markets had been pricing in three (quarter of a percentage point) rate rises in 2019, but this has now fallen to less than one. We expect some bond price volatility for US Treasuries as we head into the middle of the week.”
Bank of England’s monetary policy meeting on Thursday (20 December) follows the Fed. The BoE last raised rates in August to the current base rate of 0.75% and Sriharan expects rates to remain at this level of until there is more clarity around the final Brexit withdrawal deal. “Naturally trying to achieve visibility around that point is difficult, making the role of economic policymaker all the more difficult.”
As for the Italian budget, expect some news during the week from the European Commission on how they propose to deal with Italy and the current issues around their draft budget which are in breach of the EU’s fiscal rules.
“It looks like being a busy end to the year for Commission President Jean-Claude Juncker. By the end of the week, we will also see the release of the final estimate of third quarter GDP for the US which we expect to remain at 3.5%.” Overall, with risk sentiment having taken a nose-dive, hopes aren’t high for a so-called ‘Santa Rally.’
