Skip Navigation

No surprises from the Fed, Rutte victory a ‘shot in the arm’ for European investors

As expected the US Federal Reserve last night voted to increase US interest rates by 0.25%. In truth little emerged that would cause investors to alter their views on the trajectory for interest rate moves in 2017 and 2018.

There were only marginal changes to growth and inflation forecasts -  2017 growth is still expected at 2% while 2018 growth forecasts were lifted to 2.1% versus 2% in December. Core inflation for 2017 is expected to come in at 1.9%, only slightly above the 1.8% forecast in December.

The real message for investors was that the consensus around 3 hikes in 2017 seems to be hardening - overall 14 FOMC members saw 3 rate hikes in the March 2017 'Dot Plot' versus 11 in December. This shouldn't be a surprise considering the broad based strength in US economic data in the past three months in particular.

Chair Yellen again reiterated that this ongoing strength warranted gradual increases in US interest rates but her press conference comments ruled out a quarter point increase every quarter.

Equities, bonds and commodities all rallied on the back of the press conference while the dollar slipped significantly versus the euro (EUR/USD is trading at $1.07 this morning) although some of the euro strength was attributable to the breaking news that Dutch PM Mark Rutte topped the exit polls in the Dutch election.

We view this latest update from the Fed as validating our view that equities will outperform government bonds this year thanks to the improving global economy and a faster pace of rate hikes from the Fed. While bonds enjoyed some respite last night, we continue to expect yields to drift gradually higher in 2017.

The theory that populism would wash up on the shores of the Euro zone following the coming of BREXIT and President Trump received something of a setback last night as exit polls of the Dutch election showed that Prime Minister Mark Rutte was in pole position to head up the next government thanks to projections that he would win 31 seats. Counting so far suggests this could rise further to 33 seats. This is a drop compared to the 41 seats won in 2012 but is a much better result than polls prior to the election had pointed to.

In contrast Geert Wilders' PVV party was projected to win only 19 seats - still a significant result but one that sees him battling it out with the CDA and D66 parties for second place. This result also makes it unlikely the PVV party will influence the makeup of the next Dutch government. While this should be seen as an 'investor friendly' result, it is likely to take some months before the new Dutch government becomes a reality.

In the meantime the result is a 'shot in the arm' for European assets ahead of the French election next month. So far this morning European equities have opened higher (Euro Stoxx 600 up 0.9% at the time of writing) while as mentioned above the euro has made some gains versus the dollar.

Tom McCabe, BoIPB Global Investment Strategist, March 16 2017