• The Fund’s QDEUR hedged class gained 0.15%, +5.09% in 2017
• As expected the Fed raised interest rates by 25 bps
• US tax reform continues to make progress
• US Dollar index (DXY) fell 1%
The Fed raised the target range of the Federal Funds rate by 25 bps to 1.25-1.5% at the December meeting. Fixed income markets had low trading volumes and periods of softness on generally stronger economic data points, progress on tax reform and some upward revisions to US GDP growth estimates. However, an end of year rally meant the 10 year UST yield ended the month unchanged. The UST yield curve flattened taking the spread between the 2-year and 10-year benchmarks to decade lows during the month, and the spread between the 5s30s tightened to 10-year lows on the penultimate trading day. The DXY weakened ending the month 1% lower.
The Fed’s updated set of economic projections was a key focus for markets. The median projection for the Fed funds rate is unchanged looking for three 25 bps hikes in 2018 and two in 2019. Importantly, in spite of some upward revisions to the committee’s growth forecasts and reduced slack in the labour market, the committee’s median forecast for core PCE inflation was left unchanged at 1.9% for 2018 and 2% in 2019. According to Janet Yellen, ‘most’ participants had factored in some fiscal stimulus and changes in financial conditions as progress continued to be made on US tax reform.