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US bullish post-Trump, rate hike imminent

The knee jerk sell-off following news of Donald Trump’s presidential win seems to have faded, with markets factoring in a US rate hike next month with near certainty.

After a couple of weeks, some of the impact of a Trump presidency is now apparent, says investment firm Instreet.

“Sectors such as construction and banks have done particularly well as investors expect the new president to deliver a surge in infrastructure spending and a lighter regulatory touch,” Instreet managing director George Lucas said.

“The possible economic leg-up that the market believes Trump’s policies will deliver has also put a spark under the US dollar. In turn, investors have fled government bonds on expectations the US Federal Reserve may need to raise interest rates faster than expected to contain inflation.”

The short-term outlook appears largely positive, as US bonds rally to their highest point in a year.

“Ten-year US Treasury yields are at a 12-month high after climbing around 40 basis points since the election,” MR Lucas said. 

This market reaction now means a December rate hike looks likely.

“Chair of the Federal Reserve Janet Yellen backed this up last week when she said an increase in short-term interest rates could ‘become appropriate relatively soon’,” Mr Lucas said.

“We believe solid US data is also supporting the case for tighter monetary policy. Markets are now expecting a rate rise in December, with the federal futures market implying a 95 per cent probability of a 25 basis points hike at the FOMC meeting on 14 December.”

HSBC chief economist Paul Bloxham said this is consistent with his view that the Fed is on a slow path of rate hikes over the next couple of years. 

“We’re of the view that the Fed is on a hiking path but it’s a very, very mild one. The Fed will lift rates in December this year, December next year and again at the end of 2018,” Mr Bloxham said.

“We think rates are going to go higher but we think it’s going to be a very slow path to higher rates.”

US bullish post-Trump, rate hike imminent
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