Today is the day when we and markets expect the Fed to start lift-off delivering the first rate hike in nine years, see FOMC preview, we expect a dovish hike 14 December. The Fed has been challenged over the past week by the lower oil price, another sell-off in equity markets and not least significant stress in the US high yield market. We believe the hike is signalled so clearly that it is too late for the Fed to refrain but we expect a very dovish one, as the 'dots' outlining the FOMC members' forecast for the Fed funds rate are likely to show a subdued path of only three hikes in 2016. Fed chairman Janet Yellen is also likely to strike a cautious tone at the press conference adding to the dovish feeling. There may also be dissenters among the FOMC members.
The market is pricing around 80% probability of a hike and slightly less than two hikes next year. However, it most likely reflects a probability that the Fed will be forced to stop early versus a scenario where it continues to hike 3-4 times.
Before the Fed decision, we have Euro Flash PMI this morning with France and Germany releasing first before the Euro PMI is out at 10:00 CET. We expect a marginal increase in line with recent stabilisation of the key economic indicators. In general, we expect the European recovery to gather speed next year and we see the latest improvements as the start of this. Furthermore, it should be noted that the economic indicators have been quite resistant to the weakness in the Chinese economy. Final Euro CPI for December is released at 11:00 CET.
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