Macro Report:November FOMC meeting kept rates on hold,cautiously set stage for December rate hike

November’s FOMC meeting kept rates unchanged, in line with market expectations. Themain focus for markets was the forward guidance in the statement. We interpret the Fed’sstatement as a “soft” setup for a December rate hike. The FOMC refrained from using themore explicit “next meeting” setup seen in previous rate hikes for two main reasons: 1) themarket already has strong expectations for a December rate hike, making it unnecessary tostrengthen expectations, and 2) there are many key points to watch ahead of the meeting onDecember 14th, and any potential shocks between now and then could lead to another delay.

    In terms of the Fed’s dual mandate, we feel that if data remains stable, the Fed will have astrong case to hike in December. The job market has remained relatively steady in months,and as we have stated in previous reports, barring a significant deterioration of data, it islikely no longer is the main consideration for the Fed as it strong enough to support a ratehike. Inflation showed signs of life over the past month, as commodity prices rebounded inOctober while there were early signs of more wage push inflation. However, in the past twoweeks, a sharp downturn of oil prices creates some uncertainty as to whether or not thestabilization of commodity prices will hold throughout the next months.

    However, various events ahead could impact the Fed decision in December. The result of theUS election next week has become more unclear with the most recent Clinton email leaks,and a Trump victory or further developments in the Clinton case could create moreuncertainty. Polls also show that the December 4th referendum in Italy is also increasinglytight, and a “no” vote which would ostensibly involve PM Matteo Renzi stepping down andpotentially creating further political uncertainty in Europe. After showing signs of stabilizationand bolstering the case for higher inflation in the upcoming months, the sharp drop of oilprices the last two weeks also increases the importance of the November 30th OPEC meetingfor upcoming inflation expectations. Finally, a sharp disappointment of upcoming jobs orinflation data could also lead the Fed to further delays. Yellen’s Fed has proven to beconservative in their decision making, and while a December hike looks likely, the upcomingmonth has an unusually high amount of key events to watch.