Weekly Review: Markets Come to Terms with Fed Rate Hike


For the week ended 25 December 2015

  • Fed raises rates, reassures market
  • US housing strengthens
  • China forecasts slower growth in 2016
  • Eurozone inflation inches up
  • Oil prices continues slide

Markets were highly volatile this week, as investors digested the first US interest rate hike in nine years. Global stocks fared better overall than US indices, which gave back initial gains after the rate hike. Other data were mixed, and included modest signs of recovery in China and the eurozone.

The Chicago Board Options Exchange Volatility Index (VIX) straddled 20 for much of the week, down from its previous-week peak but above the mid-teens, where it had been for much of the year. The yield on the 10-year US Treasury note settled near 2.21% after breaching 2.30% briefly Wednesday following the US Federal Reserve rate hike.

The price of crude oil continued to slide to multiyear lows on a global supply glut, with US West Texas Intermediate and Brent crude priced near $35 and $37.50 per barrel, respectively, on Friday.

US and global economic news

Fed raises interest rates with dovish message
In a much anticipated move, the Fed announced the first interest rate hike in nine years, showing confidence in the economy, while giving assurances that further rate hikes would be gradual. The federal funds rate moved up a quarter of a percentage point to 0.25%–0.50%. The vote to raise rates was unanimous. Economists forecast the rate would be 1.0%–1.25% by year-end, 2016.

US inflation rises to 0.5% annually
The US Consumer Price Index was flat in November while core CPI –– excluding food and energy –– rose 0.2%. For the year, CPI rose 0.5% while core prices were up 2.0%.

House passes bipartisan spending bill, opens oil exports
The US House of Representatives passed a spending bill Friday morning that will fund the government through September and lift a 40-year ban on oil exports. The Senate was expected to pass the bill later Friday. In exchange for lifting the long-time ban on exporting crude oil, Democrats secured an agreement extending wind and solar tax credits and reauthorizing a conservation fund.

US housing indicators improve
US housing starts rose 10.5% in November to a seasonally adjusted annual pace of 1.17 million units, and building permits soared 11% to a five-month high. It was the eighth straight month of more than 1 million units in annualized housing starts, the longest stretch since 2007. Builder confidence dipped in December. However, the one-point drop to 61 in the National Association of Home Builders/Wells Fargo Housing Market Index still indicated a positive outlook, up from 58 a year ago and well above the neutral mark of 50.

US weekly jobless claims fall to 271,000
Initial jobless claims declined 11,000 to 271,000 for the week ended 12 December. The four-week moving average dipped 250 to 270,500. Weekly jobless claims have remained below 300,000 for 41 consecutive weeks, the longest such run since the early 1970s. Continuing claims fell by 7,000 to 2.24 million for the week ended 5 December.

China forecasts 6.8% growth in 2016
The People’s Bank of China predicts China’s GDP will grow at a 6.8% pace in 2016, down from a revised 6.9% forecast for 2015. A PBOC research paper said supportive factors include rising real estate sales, a delayed response to government stimulus and modest improvement in global demand. However, the Chinese Academy of Social Sciences forecast slowing investment and a drop in exports.

China’s industrial production rises 6.2%
China’s industrial production accelerated 6.2% in November from a year earlier, up from 5.6% in October. This exceeded a median forecast of 5.7% by economists. The pickup in production was seen as a sign that government stimulus is beginning to make its mark.

Eurozone industrial output rises 0.6%
Eurozone industrial production grew 0.6% in October and rose 1.9% year over year. The increase in production was the first since July. The market had expected a more muted 0.2% monthly advance.

Eurozone inflation ticks up 0.2% in November
Inflation in the eurozone rose by 0.2% in November, slightly more than forecast. Core prices, excluding food and fuel costs, were flat on an annual basis.

German confidence gauges mixed
Germany’s ZEW investor sentiment index rose for the second straight month in December. The current situation index rose to 55 from a previous reading of 54.4. However, the Ifo Institute’s business climate index fell slightly, to 108.7 from 109 in November, a sign of a lack of confidence in the ECB’s efforts to stimulate growth.

US and global corporate news

Newell Rubbermaid to buy Jarden for $15 billion plus
Newell Rubbermaid has agreed to buy fellow consumer-goods producer Jarden in a deal worth more than $15 billion in cash and equity. The merger brings together iconic consumer brands including Mr. Coffee, Sharpie markers, Yankee Candle and Rubbermaid. The two companies produce complementary products for the same market.

FedEx delivers better-than-expected earnings
Global delivery firm FedEx’s third-quarter results beat expectations for adjusted earnings per share. The company’s management remains optimistic about 2016 volume growth despite some pressures.

The week ahead

  • US gross domestic product is updated on Tuesday, 22 December.
  • US existing home sales are reported on Tuesday, 22 December.
  • UK GDP is reported on Wednesday, 23 December.
  • US durable goods orders, new home sales and consumer confidence are reported on Wednesday, 23 December.
  • Japan reports its consumer inflation, household spending and unemployment rate on Thursday, 24 December.

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell or an indication of trading intent on behalf of any MFS product.

Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual or quarterly report. Full holdings are also available on the individual Fund Summary tab in the Products section of mfs.com.

Past performance is no guarantee of future results.


Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.


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