Equities marched higher this week in response to higher interest rates and tax reform progress. The Nasdaq led with a rally of 1.41 percent. The Dow Jones Industrial Average followed with an increase of 1.33 percent.
The Federal Reserve raised interest rates a quarter point to a range of 1.25 to 1.50 percent, as anticipated. SPDR Financials (XLF) fell slightly though the long-term outlook for financials has improved with economic forecasts and a hawkish Fed statement. Fed officials expect three rate hikes next year and hiked the GDP growth forecast for 2018 from 2.1 to 2.5 percent. They also lowered their unemployment forecast from 4.1 to 3.9 percent. The Fed also lowered its inflation forecast.
Rate hike expectations for March rose to 63 percent, and the odds of a June hike hit 84 percent following Fed Chair Janet Yellen’s last FOMC meeting. Jerome Powell will assume the role at the January meeting.
Strong economic data pushed the Atlanta Fed’s estimate of fourth-quarter GDP growth to 3.3 percent. Weekly jobless claims were 10,000 lower than expected at 225,000. The lowest figure this year was 223,000 initial claims for the week of October 14th. November retail sales increased 0.8 percent, doubling expectations. Sales ex-autos rose 1.0 percent. The flash Markit manufacturing PMI for December hit 55.0, up from 53.9 last month. It signals a faster pace of expansion in the manufacturing sector. Inflation data was mixed, with the PPI and CPI hitting headline expectations, but core CPI missing with an increase of only 0.1 percent.
Chinese economic data showed slowing. Chinese officials are expected to trim their GDP forecast for 2018. The European Central Bank left interest rates and the asset buying program unchanged. iShares MSCI EAFE (EFA) gained 0.19 percent. iShares MSCI Emerging Markets (EEM) increased 0.50 percent. SPDR S&P 500 (SPY) rose 0.81 percent, extending the outperformance of domestic markets.
Traders initially sent the U.S. dollar lower following the Fed meeting, but it recovered most of its losses on Friday. The euro fell after the ECB held steady and Italy announced elections for March. Anti-euro and anti-EU parties have dominated early polling. iShares MSCI Italy (EWI) erased four months of modest gains this week, losing 3.13 percent.
Oracle (ORCL) beat earnings and revenue forecasts, but it missed on cloud revenue. Shares fell 3.77 percent on Friday following the report. The miss didn’t dent the software sector, however. iShares North American Software (IGV) gained 1.27 percent on the day following solid gains and a new all-time high from Microsoft (MSFT).
Costco (COST) shares jumped 3.32 percent to a new all-time high after it beat estimates.