Credit Environment Supportive Compared to Last Year’s Hike

It took a whole year but the Federal Reserve finally managed to get the second interest rate hike of this hiking cycle. The hike was almost universally expected and investors focused on the Fed’s future hiking plans. The number of hikes expected by the Committee in 2017 shifted higher from 2 hikes to 3 hikes clearly sending a hawkish signal. The US Dollar strengthened after the meeting as ECB and Bank of Japan still remain in easy money mode.

Cyclicality Should Work Under A Rising Rate Environment

A nice chart from Renaissance Macro shows the relative performance of S&P500 sectors when interest rates are rising. Since the financial crisis the prior five periods of rising yields have seen the S&P500 deliver positive returns. Even in this post financial crisis environment the market tends to favour cyclical sectors when rates rise. This is exactly what we have seen since the election and it should continue to see as rates rise.

What Will Derail The Trump Rally?

Investors have aggressively rotated out of bond proxies and into cyclical assets since the election see below. Optimism and anticipation of expansionary fiscal policy, lower taxes and laxer regulation has been the main driver of these moves.

When USD Is Down In December Materials and Tech Are The Best Performing Sectors

Since the Presidential election the US dollar has had quite the run rising 3.3% and managing to break out of a two year consolidation, see below. After such a run the USD could be due for a correction, something to keep in mind ahead of the Fed.

Bank of Canada Holds Rates Steady But Highlights Weak Exports and Investments

As expected the Bank of Canada held interest rates steady at 0.50% today highlighting that economic growth has developed largely as the Bank expected since its October meeting. The Bank did note that business investment and non-energy exports continue to disappoint and that “a significant amount of economic slack remains in Canada.” However the Bank’s Governing Council determined that the current policy remains appropriate.