US CPI in December
According to data provided by the US Bureau of Labor Statistics, the US inflation index stood at 0.3% in December 2016 compared to 0.2% in November 2016. The inflation figure met the market’s expectation of 0.3%.
On a yearly basis, the inflation index stood at 2.1% in December 2016. The inflation figure has gradually risen to meet the Federal Reserve’s 2% target level. In the last four months, inflation figures have improved gradually.
The inflation index is an important indicator for the economy. The improvement in this index is a positive sign for the economy and for the market, as it indicates that consumption is on the rise.
On December 14, 2016, the Fed announced a long-awaited interest rate hike for the first time in 2016. The FOMC (Federal Open Market Committee) announced a hike of 25 basis points to the federal fund rate, bringing it to the 0.5%–0.75% range.
The Fed’s future rate hike forecast surprised the market. The FOMC announced that it could raise the key interest rate three times in 2017. This statement indicated that the Fed was optimistic about the US economy (SPY) (QQQ) (SPXL) and that we could see more hikes sooner compared to the long wait leading up to the recent rate hike.
If the inflation figure continues its stronger performance in the future, and if the labor market also continues its stronger performance, then we could see a gradual rate hike process. The prolonged lower interest rate was a major problem for various asset classes. It created an asset bubble, which is a major risk for the market (IVV) (IWM). Now the gradual rate hike process may change this scenario.
In the next part of this series, we’ll analyze the performance of China’s fourth quarter GDP in 2016.