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Global Markets:

• Asian stock markets: Nikkei down 0.30 %, Shanghai Composite fell 0.40 %, Hang Seng lost 0.45 %, ASX 200 declined 0.25 %
• Commodities: Gold at $1237 (+0.35 %), Silver at $17.98 (+0.20 %), WTI Oil at $54.10 (+0.95 %), Brent Oil at $56.35 (+0.90 %)
• Rates: US 10-year yield at 2.41, UK 10-year yield at 1.20, German 10-year yield at 0.28

News & Data:

• Bank of Korea Leaves Base Rate Unchanged at 1.25%
• Japan Services PPI (YoY) Jan: 0.5% (est 0.5% rev prev 0.5%)
• Australian Private Capex (QoQ) Q4: -2.1% (est -1.0% rev prev -3.3%)
• Australian Building Capex (QoQ) Q4: -4.1% (rev prev -3.6%)
• Australian Plant/Machinery Capex (QoQ) Q4: 0.4% (rev prev -3.0%)
• PBoC Fixes USDCNY Reference Rate At 6.8695 (prev fix 6.8830 prev close 6.8781)
• Asia stocks ease, dollar steadies after Fed-led losses

Markets Update:

The Dollar declined overnight, after the FOMC minutes showed that the US central bank remains cautious. The Fed said that it may be appropriate to raise rates again fairly soon should jobs and inflation data be in line with expectations. However, the minutes did not clearly signal that a rate hike will follow next month, and did not reveal much information that wasn't already known.

EUR/USD rose from 1.0495 to 1.0570 post-FOMC. However, the on-going concerns about the upcoming elections will likely prevent larger gains. The rally in the British Pound after the FOMC minutes release was weaker. GBP/USD rose from 1.2410 to only 1.2460 and retraced most of the gains in the Asian session. The weak UK GDP numbers are still weighing on the currency.

USD/JPY declined from 113.60 to 113.00, but support held and the pair bounced to 113.45 in Asia. Nevertheless, the outlook remains negative and a retest of 112.55 support likely.

Upcoming Events:

• 07:00 GMT – German GDP
• 07:00 GMT – German GfK Consumer Climate
• 13:30 GMT – US Initial Jobless Claims
• 14:00 GMT – US House Price Index

The FOMC minutes for the January meeting were a hawkish one. Many members expressed the view that it would be 'appropriate' to increase interest rate again 'fairly soon'. A few of them suggested removing policy accommodation in 'a timely manner'. However, there was no indication that it should arrive in as soon as March. Indeed, more clarity on the fiscal stimulus plan is needed before the members could decide on the timing of the rate hikes. While the general outlook to the economy remained upbeat (the description on the employment market was especially constructive),'a few' members were concerned about downside risks to the inflation outlook.

On the timing of rate hikes, the minutes unveiled that 'many participants' judged that 'it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the committee's maximum-employment and inflation objectives increased'. It added that 'a few participants' believed that 'continuing to remove policy accommodation in a timely manner, potentially at an upcoming meeting, would allow the Committee greater flexibility in responding to subsequent changes in economic conditions'. It appears that, during the January meeting, few members had strong conviction for a rate hike in March. Meanwhile, the minutes noted that 'a few' members remained concerned about downside risks to the inflation outlook. The members also briefly talked about the balance sheet strategy. They generally 'agreed that the committee should begin discussions at upcoming meetings about the economic conditions that could warrant changes in the existing policy of reinvesting proceeds from maturing Treasury securities and principal payments from agency debt and mortgage-backed securities, as well as how those changes would be implemented and communicated'.

As US President Donald Trump has yet to announce his fiscal expansion plan, the FOMC members emphasized their 'considerable uncertainty' about possible changes in 'fiscal and other government policies' as well as 'about the timing and magnitude of the net effects of such changes on economic activity'. The members indicated that 'the possibility of more expansionary fiscal policy as having increased the upside risks to their economic forecasts'. Some, however, suggested that 'several potential changes in government policies could pose downside risks'.

The minutes revealed little news after the accompanying statement, released in early February, and Chair Yellen's testimony last week. The encouraging economic developments, in particular the employment market, and the upbeat outlook of the members signals the median forecast of three rate hikes this year remains intact. However, March might still be a bit early for a move, as the members would like to have more clarity on the fiscal stimulus plan.

EUR/USD

The EUR/USD pair plunged to 1.0493 following London's opening, with the dollar gaining some traction as stocks jumped higher, and the common currency undermined by political woes. Data coming from Germany surprised to the upside, as the IFO survey showed that business sentiment improved in February, rising up to 111.00 from previous 109.8, with the assessment of the current situation up to 118.4 and expectations also on the rise, up to 104. Euro area annual inflation matched initial estimates, as the CPI was 1.8% in January 2017, up from 1.1% in December 2016, while it fell monthly basis by 0.8%, as expected.

In the US, existing home sales soared in January, up 3.3% to a seasonally adjusted annual rate of 5.69 million, but the EUR/USD pair turned higher, in the US afternoon, hitting 1.0565 after centrist Francois Bayrou confirmed he will not stand in France's presidential election and has offered an alliance to independent candidate Emmanuel Macron, joining forces against far-right candidate Marine Le Pen. Despite the price reaction was limited, as investors were waiting for FOMC Minutes, it clearly indicated how sensitive the common currency is to political risk.

The EUR/USD pair spiked beyond the mentioned high, after the FED Minutes showed that many FED officials see a rate hike happening "fairly soon," if the economy remains on track, but also consider that there's a modest risk of significant inflation. Also, policymakers didn’t advance their plans for the balance sheet, saying they will discuss the matter in later meetings.

Technically, the 4 hours chart shows that the price is struggling around the mentioned Fibonacci level, with the 20 SMA heading lower above the current level, and technical indicators recovering from oversold readings, but holding within negative territory, indicating limited buying interest at current levels. A recovery beyond 1.0590 could favor additional gains, but it would take an advance through 1.0635, to reduce chances of a new leg lower below 1.0500.

Support levels: 1.0520 1.0470 1.0440

Resistance levels: 1.0590 1.0635 1.0660

USD/JPY

After spending most of the day under pressure, the USD/JPY pair bounced from a daily low of 112.90 mid American afternoon, as market's sentiment improved following news that French candidate Francois Bayrou withdrew from the presidential race to join Emmanuel Macron against Marine Le Pen. US Treasury yields bounced with the 10-year benchmark up to 2.45% from previous 2.43%. The pair stabilized around 113.50 ahead of the FED's Minutes, but fell after the release of the document, as the dollar was unable to rally following policymakers' pledge to raise rates "fairly soon," should the economy remains in the growing path. The pair was once again weighed by yields, as the 10-year benchmark fell back to 2.42% following FED's news. From a technical point of view, the risk remains towards the downside, as intraday advances remained contained by a bearish 200 SMA, currently around 113.70, whilst the price pressures its 100 SMA, and technical indicators turned lower around their mid-lines. Another attempt below 112.90, particularly if Asian shares fall, will probably open doors for additional declines towards the 112.00/20 region this Thursday.

Support levels: 112.90 112.50 112.10

Resistance levels: 113.70 114.20 114.60

GBP/USD

The GBP/USD pair continued struggling for direction this Wednesday, surging up to 1.2507 at the beginning of the day amid EUR/GBP falling to fresh yearly lows, and later falling to 1.2422, in spite of an upward revision to UK quarterly growth. The second estimate of Q4 GDP, was revised slightly higher to 0.7% from 0.6%, although the annualized figure came in at 2.0%, below the first estimate of 2.2%. Business investment fell by 1.0% in the same quarter, when compared to the previous one. The dollar gained some strength ahead of the release of the FOMC Minutes, backed by FED's Powell comments, who said that the risk facing the US economy and more in balance, allowing the Central Bank to raise rates. The Minutes failed to boost the greenback, helping the GBP/USD to bounce back to mid-range. Technically, the pair has made no progress, still neutral as in the 4 hours chart, the price continues moving back and forth around a horizontal 20 SMA, whilst technical indicators are back around their mid-lines, with no clear directional strength.

Support levels: 1.2430 1.2380 1.2345

Resistance levels: 1.2480 1.2530 1.2565

GOLD

Gold prices advanced modestly at the beginning of the day, but trimmed gains and returned to opening levels ahead of the FOMC Minutes release, late in the US afternoon, and also paring gains as news coming from France took some pressure off the EU. Spot gold recovered back and settled at $1,237.80, as dollar's bulls didn't get enough from the minutes, which made no references to a certain date when it comes to rising rates. The technical picture for the commodity, however, hasn't changed, as the price remains within its latest range. In the daily chart, the 20 DMA maintains a strong bullish slope, now converging with the 50% retracement of the post-US election decline around 1,230.00, the RSI indicator continues consolidating around 62, whilst the Momentum indicator extended its slide within positive territory, now pressuring its 100 level. In the 4 hours chart, technical readings present a neutral stance, as technical indicators hover around their mid-lines with no clear directional strength, whilst the price moves back and forth around a horizontal 20 SMA.

Support levels: 1,231.20 1,226.10 1,216.60

Resistance levels: 1,244.60 1,255.10 1,261.60

WTI CRUDE

Crude oil prices retreated after flirting with multi-month highs on Tuesday, weighed by comments from Qatar's oil minister Mohammed al-Sada, who said that major oil producers outside the OPEC weren't cutting production as much as agreed last November, adding that compliance by non-OPEC members is about 50% of what has been promised. Adding to the bearish case news showed that US oil producers exported a record of 7 million barrels during the first week of February. West Texas Intermediate crude oil futures settled at $53.55 a barrel, the lower end of its weekly range. The daily chart shows that the price is now around a flat 20 SMA, whilst the Momentum indicator remains flat around its 100 level. The RSI indicator in the mentioned chart has returned to the 50 region, with a modest downward slope. In the 4 hours chart, the price has accelerated lower after breaking below an anyway flat 20 SMA, whilst technical indicators settled within negative territory with no clear directional strength.

Support levels: 53.40 53.00 52.50

Resistance levels: 54.10 54.75 55.30

DJIA

US stocks closed the day mixed, with the Dow Jones Industrial Average extending its rally to record highs, after an intraday decline following FOMC Minutes, up by 32 points to settle at 20,775.60. The Nasdaq Composite and the S&P closed in the red, with the first down 0.09%, to 5,860.63 and the second ending at 2,362.82 after losing 2 points. US equities pared early gains after the Minutes from the latest FED meeting showed that policymakers, despite supporting a soon rate hike, are still concerned about Trump's fiscal policy. The daily chart for the DJIA shows that the benchmark holds at its daily highs after the close, not far from the mentioned close, whilst technical indicators maintain their upward momentum, despite being in extreme overbought territory. The index has posted its largest bullish streak in three decades, and despite technical readings continue supporting an upward extension, the possibility of a downward corrective movement can't be dismissed at this point. In the shorter term, and according to the 4 hours chart, the 20 SMA continues leading the way higher, with buying interest surging on approaches to it, and technical indicators holding well into positive territory, albeit losing their upward strength.

Support levels: 20,730 20,692 20,638

Resistance levels: 20,780 20,825 20,860

FTSE 100

The FTSE 100 managed to advance 27 points or 0.38%, ending the day at 7,302.25, helped by a recovery in Unilever, as the company announced it will review ways to increase value for shareholders, with the share ending the day up 6.85%, right behind Capita, which added 8.66%. Lloyds Bank was also among the best performers, adding 4.39% after reporting an increase in its statutory profits from £1.6 billion in 2015, to £4.2 billion, and confirmed a £2.2 billion dividend payout to shareholders. Mining shares were among the worst performers, with Anglo American ending the day3.75% lower and BHP Billiton shedding 2.70%. The index has advanced within range, still holding above its 20 DMA in the daily chart, and with technical indicators consolidating within positive territory, with no clear directional strength. In the shorter term, and according to the 4 hours chart, the index maintains a neutral stance, hovering around a horizontal 20 SMA and with technical indicators heading nowhere around their mid-lines.

Support levels: 7,296 7,253 7,212

Resistance levels: 7,319 7,354 7,390

DAX

European equities opened with a strong footing, but the upward momentum faded as the session went back, and the German DAX closed the day modestly higher at 11,998.59, up by 31 points, anyway the highest close since March 2015. ThyssenKrupp was the best performer by adding 4.29%, followed by Fresenius Medical Care that closed 2.02% higher. Volkswagen on the other hand was the worst performer, down 1.72%, followed by Bayer that shed 1.20%. The index briefly advanced above 12,000, overall maintaining the positive tone, as in the daily chart, it settled above a bullish 20 DMA, whilst technical indicators have lost upward strength, but hold well above their mid-lines. In the 4 hours chart, the index is far above a now sharply bullish 20 SMA, whilst technical indicators have barely retreated within overbought territory, with no signs of changing bias any time soon.

Support levels: 11,965 11,920 11,873

Resistance levels: 12,031 12,079 12,128

STOCKS

Dow and Dax are trading higher; Dax and Shanghai looks bullish for the near term. Nikkei is consolidative. Nifty has crucial resistance just above current levels.

Dow (20775.60, +0.16%) and Dax (11998.59, +0.26%) are trading higher. We need to watch price action of Dow near 20800 which is an immediate resistance and could produce small rejection in the near term. On the other hand, Dax looks bullish towards 12090- 12100 levels.

Nikkei (19312.07, -0.35%) is almost stable and lacks momentum just now. Stuck within the 19000-19620 region, iwould be difficult to get any immediate directional clarity unless we see a break on either side of the range.

Shanghai (3251.59, -0.30%) is trading perfectly within the daily up-channel and while that holds, we could see a rise towards 3275-3300 in the coming sessions with some small intermediate dips. Overall trend is up for the near term.

Nifty (8926.90, +0.21%) has come up to test the previous high near 8968 seen in Sep’16 and while that could act as an immediate resistance, we could see a corrective fall from current levels towards 8700. Only a break above 9000, if seen (less likely)can we negate an immediate correction from current levels.

COMMODITIES

Gold (1237) and Silver (17.98) both are trading within their sideways channel of 1217-47 and 17.60-18.35 respectively with no directional bias. A break below 1226 (Gold) and 17.90 (Silver) could open up the lower bands of the channels.

Copper (2.71) was unable to close above its pivot of 2.76 of its recent trading range of 2.60-83, though it is still holding its upward trend line support at 2.68-70 since October 16. A close below that could open up 2.55-60 levels.We have US unemployment data at 7.00 pm IST, which could influence the price of copper as well as silver.

Brent (56.29) and WTI (54.06) both are trading within their respective ranges of 54-59 and 50-56.Today we have US crude inventories data at 9.30 pm IST, which may add volatility.

FOREX

Although the FOMC Minutes yesterday talked about a rate hike "fairly soon", US Yields (10Yr 2.41%) have dipped a little and the US Dollar Index (101.37) has also paused for a while just below 101.50. The overall Dollar strength still dominates while above 100.50, but a rise past immediate crucial Moving Average Resistances near current levels need to be broken in order to propel the Dollar Index higher towards 102+.

The Euro (1.0550) indeed saw a limited downside at 1.0500 yesterday and has bounced slightly. While the overall trend suggests an eventual break below 1.0500 while the Euro stays below 1.07, a couple of days of sideways movement between 1.05-06 could be seen.

Dollar-Yen (113.25) has good Support at 113.00 and can rise to 114+ while that holds, in line with the view expressed yesterday. The Euro-Yen (119.60) could test 120.20 in the near term (today).

Despite attempts to the upside, there has been weakness in the Pound (1.2445) since yesterday as it has been unable to rise above 1.2525. A break below 1.2400 could be bearish towards 1.2250 next week. A two-way possibility here.

The Aussie (0.7683) may be finding Resistance near 0.7700 in the near term. Stronger Resistance also available at 0.7800. Upside might be limited while these hold.

Dollar-Rupee (66.97) could see a bit of a rise if the Sensex/ Nifty were to fall today, especially since the RBI seems to have been buying continously above 66.90. The market is closed for Mahashivaratri tomorrow.

INTEREST RATES

The US yields have come down to re-test immediate support on the near term charts. A break below the support levels could initiate a sharp fall in the near term. Else we could possibly see some more sideways movement before a break on the downside.

The German-US 2Yr (-2.11%) has bounced slightly from -2.13% and in case it fails to rise immediately from current levels, we could see a further fall in the spread favoring Dollar strength in the near term. In that case, Euro could move down at a faster pace. (Refer to FOREX section above)

The Japanese yields have fallen. The 5YR (-0.117%), 10Yr (0.08%) and the 30Yr (0.85%) have fallen from levels near -0.115%, -0.09% and 0.87% respectively. The 5Yr and the 30YR has support at current levels and could possibly recover in a few sessions while the 10Yr may fall a little more in the near term.

The 10YR GOI (7.0964%) has been rising sharply and could test immediate resistance at 7.10%. Failure to fall from 7.10% could turn very bullish towards 7.2% in a short span of time. Surprisingly Dollar-Rupee has lost its correlation with the GOI in the recent sessions and the rise in the GOI is unable to pull up Dollar-Rupee to higher levels. So the GOI may possibly not act as an important cue for Rupee in the near term.

EURUSD - With the pair continuing to weaken further on Wednesday, more decline is likely in the days ahead. On the upside, resistance comes in at 1.0550 level with a cut through here opening the door for more upside towards the 1.0600 level. Further up, resistance lies at the 1.0650 level where a break will expose the 1.0600 level. Conversely, support lies at the 1.0450 level where a violation will aim at the 1.0400 level. A break of here will aim at the 1.0350 level. Its daily RSI is bearish and pointing lower suggesting further weakness. All in all, EURUSD faces further downside pressure on declines

.

How soon is now

The Fed's January FOMC minutes revealed a consensus among Fed members to raise rates, but the minutes offered up little more than studiously ambiguous double talk by suggesting a rate hike would be delivered “fairly soon”. Short-term dollar speculators were hoping the Feds would produce a more meaningful time frame, but dealers are left dangling. Just like the ever cautious Dr Yellen, awaiting clarity regarding the yet-to-be implemented Trump policies.

Euro

The European election risk has undoubtedly influenced the weakness in the Euro overnight, and to a lesser degree, the move was stretched by short-term speculators getting long USD dollar ahead of the FOMC. Dealers hoped the Feds would take this opportunity to lay their March Rate hike cards on the table, however, after touching a low of 1.0495, the EUR pivoted higher when leading centrist Emmanuel Macron agreed to an offer of an alliance from centrist Francois Bayrou. EURO investors breathed a temporary sigh of relief that this marriage would reduce Le Pen's chance of victory.

The move higher was compounded by day trade speculators exiting Euro shorts in a gradual fashion The EURO then again gapped higher as weak pre FOMC minutes shorts ran for the exits post-Fed obfuscation. However, ongoing concerns about increasing traction from far-right and anti-EU candidate Le Pen should keep the Euro well offered and with so much ambiguity in the run up to the first phase of the French election; the Euro will be severely tested in the weeks ahead. If you need any further conviction, consider Le Pen's tweets saying that the euro is “banker's money” and “not for the people.” It is hardly a positive signal to the European investment community.

Australian Dollar

With RBA's Lowe raising the bar for rate cuts, coupled with FOMC minutes double talk, the Australian dollar has bounced above .7700 as the USD dollar floundered across G-10. However, we need to keep in mind that the market has adopted a day trade mentality as positioning, positive or negative, gets quickly nipped for fear of getting caught wrong-footed in a market fraught with uncertainty. It is as if holding a position for over 3 hours is considered a long term trade in this environment.

Although the Feds were less hawkish than short term positioning was comfortable with, traders shouldn't fall into the trap of thinking the Feds are not preparing for lift off, as this morning's dollar sell-off was little more than pull back from the market's enlarged event risk view. Expect these types of position event moves to continue as dealers desperately grapple for conviction.

The AUD should remain constructive on the back of the short term carry and supportive commodity prices. However, with uncertainties in every pocket of the market abounding, global risk outlook certainly looks fragile which could impede any short-term move higher. Look for the European political risk to heighten while on the US rates front, traders will pay substantial attention to the incoming US economic data and remain vigilant and on guard for any comments from Camp Trump.

Australian CAPEX missed badly on the downside, coming in at -2.1% vs. -.05 % expected, but given the primary focus remains on external drivers, do not expect the Australian dollar to fall too sharply. However, it will certainly dampen topside momentum.

Japanese Yen

JPY/USD is all about short-term positioning and little more. The dip post FOMC minutes was little more than a reflection of short-term punters unwinding positions after rolling the dice on an under-priced March Fed Rate Hike scenario.

The two divergent drivers, Eurozone political risk and a Fed Rate Hike, will likely keep the edges of recent support and resistance intact at ¥112-115. Given the overwhelming concern about the Eurozone election risk, thoughts of impending risk aversion will continue to keep the top side USDJPY in check as EURJPY selling if very much in play which favours the downside in the absence of economic clarity from Camp Trump. However, I do not see the battle of the $ Bulls and Bears abating anytime soon, so get ready to ride that rollercoaster.

If that EUR/GBP level looks familiar, that's because it is.

Yes, we've used this EUR/GBP support level a few times now. Click that link and follow the path back in time through our EUR/GBP posts to see how each time price came back to this level, it was respected.

Mark your higher time frame levels, and you really don't have to keep changing them all that often.

EUR/GBP 4 Hourly:

So after dropping through the level briefly, you can see price has pinged back above it. This is where the pair comes back into play for us and we go back to looking for short term retests to get long.

Now zoom into the 15 minute chart and I love the way that price has respected both sides of the zone, using it as steps as it moves through it. This shows that even though the level looks like it has been simply chopped through on the higher time frame, when you zoom in, it is very technical in its movement.

EUR/GBP 15 Minute:

From here I've drawn a couple of levels to look for short term retests that you can manage your risks around. Do you see the pair as in play again, or are we pushing our luck with how many touches the level has already got?

Those hoping the minutes of the latest FOMC meeting would make up for the lack of colour in February's little-changed policy statement will have been disappointed by today's release. There was, predictably, no discussion of raising rates at the February meeting on the heels of December's rate hike. Many participants noted that a further increase in the fed funds rate would be appropriate "fairly soon" if the incoming data met or exceeded their expectations. That comes as no surprise given recent comments from Fed speakers. Some participants thought it might be appropriate to raise rates as soon as the upcoming meeting in March - seeing an opportunity to increase the Committee's flexibility to respond to any unexpected firming in economic conditions - although that view did not appear to be widespread.

The Committee's assessment of economic conditions was relatively upbeat, mirroring some of the few changes in February's policy statement. Participants noted solid domestic demand toward the end of last year, further improvement in labour market conditions and gradually rising inflation; however, those positive developments were not enough to change their economic forecasts or monetary policy outlook relative to December. It is worth noting that, since February's meeting, we have seen upside surprises in employment and inflation reports for January. Risks to the outlook were once again characterized as "roughly balanced", though participants saw the potential for fiscal stimulus as increasing upside risks to the outlook, while several saw the risk of slower economic activity as "diminished somewhat". Some thought uncertainty should not prevent the Fed from removing monetary policy accommodation in the near-term although others warned against adjusting monetary policy in anticipation of fiscal policies that might not materialize or be as effective as anticipated.

Our Take:

As with the post-meeting statement, February's minutes provide little for markets to digest in terms of forward guidance on rate hikes or reinvestment. Recent comments from Fed officials indicate that while there is no rush to shrink the balance sheet, further rate hikes in the coming months are likely. A run of positive economic data and a slightly hawkish tone from Chair Yellen last week raised the odds of a rate hike at the upcoming meeting, although markets continue to see that as less than a 50/50 prospect. Today's minutes seem consistent with that interpretation - while there was some appetite to raise rates as early as March, there is little evidence that a consensus is forming. We remain of the view that a hike is likely by mid-year but that the Committee will wait until June hoping there is more clarity on fiscal policy.

In the first meeting of 2017, the outlooks of most Federal Open Market Committee (FOMC) participants were little changed from the December round, with most members expecting a continuation of moderate expansion in economic activity and a gradual rise in inflation to target over the medium-term.

The FOMC largely judged the balance of risks to the outlook as even. Having said that, participants noted the "considerable uncertainty about the prospects for changes in fiscal and other government policies" both in terms of timing and the magnitude of the impact on the economy. While most viewed the potential for fiscal policy to have increased "upside risks," some noted "several potential changes in government policies" may result in downside risks. While many viewed the external downside risks as having diminished, several indicated that many risks still remain, particularly those associated with U.S. dollar appreciation, financial vulnerabilities in "some foreign countries," and the still low level of the fed funds rate.

Some participants remained concerned that faster-than-expected economic growth and/or undershooting of the long-term unemployment rate posed upside risks to the inflation outlook, arguing that inflation metrics have begun to tick-up at the end of 2016. This view was balanced by the doves, who argued that the appreciating dollar, and still low levels of inflation compensation and expectations posed a downside to the outlook for price growth. Moreover, patience was advised by some participants arguing that the labor market still has some healing to do given that workers continue to be pulled off the sidelines, quits rates are rising, and wage compensation is still accelerating.

Most participants expected that a "gradual" pace of rate increases was likely to be appropriate to achieve the FOMC's dual-mandate. Still, many participants opined that it may be "appropriate to raise the federal funds rate again fairly soon" as long as incoming economic information was in line or stronger than current expectations or if "risks of overshooting" the targets increased. Few participants highlighted the need to "timely" remove accommodation, "potentially at an upcoming meeting," given the risks of "overshooting," which could potentially necessitate the need to raise "more quickly than most participants currently anticipated."

Participants felt that discussions about its "reinvestment policy" should take place at upcoming meetings, with implementation and communication of any changes being top of mind.

Aside for that, much of the discussion during the first meeting of the year had to do with procedural matters, such as reaffirming and/or amending the statement on longer-run goals and monetary policy strategy. On this front, the only difference prior to last year's statement was the estimate of longer-run normal rate of unemployment, which was now thought to be lower at 4.8% (down from 4.9% during the January 2016 meeting round).

The Committee also decided to add fan charts to its Summary of Economic Projections so as to highlight the potential uncertainty related to individual participants' projections and enhance its external communications mandate. Participants also suggested a need to alter its communications as far as the "anticipated path for the policy rate" or "dots" should economic outlook change.

Key Implications

There was lots of discussion during the first meeting of 2017, with procedural matters taking up a large portion of the participant's time. On that front not much has changed, besides tweaks to communication strategy that would include fan charts and potential changes to the "dot" plots. This could be partly motivated by the FOMC becoming increasingly uncomfortable with the markets associating the "gradual" pace of rate hikes with just one or two per year. The blackout period was also extended by a few days.

The perennial discussion about how much slack remains in the economy remained top of the discussion agenda, but the hawks appeared to have the upper hand during this meeting, with more participants appearing concerned that there is more of a potential for an overshooting on the inflation target associated with faster-than-expected economic growth. Such a scenario could necessitate a faster need for rate hikes, which could pose a greater risk to the economy than starting earlier and moving more gradually.

Overall, the minutes suggest the Fed feels increasingly uncomfortable with being boxed into a path of rates that the markets have determined as "gradual" and will try to keep every meeting as "live" as possible. While we don't rule out a March or May hike, should the data continue coming in relatively constructive - particularly on the inflation metric front - our baseline scenario remains for a mid-year hike and another one later on in 2017.

Canadian retail spending was down 0.5% in December, well below consensus which called for a flat reading. The decline was even heftier, at 1% in volumes terms, as Canadians pulled back on gift buying last year.

The biggest driver in the decline in retail sales was a 9% drop in motor vehicle sales - not your typical Christmas gift, unless you are on Santa's really good list. But, even after excluding sales of vehicles, parts, and gasoline stations, spending was down a sizeable 1.4% in December - a third contraction in the last four months of 2016. The decline was fairly broad based across your typical Christmas shopping categories, led by health and personal care stores (-4.1%), clothing and clothing accessories stores (-3.7%), beer, wine and liquor stores (3.6%) and general merchandise stores (-1.3%). Sales also slumped across in the luxury-segment of jewellery, luggage and leather goods stores (-12.4%).

Key Implications

Ultimately, December's decline in retail sales is coming on the back of four months of hearty gains, and despite the pullback the consumer remained a main driving force for Canadian economic activity in the fourth quarter of 2016. Motor vehicle sales are still near record high levels, a good sign that Canadian consumers are feeling pretty optimistic about future employment and income prospects.

The December report highlights changing patterns in consumer behaviors. Canadian consumers seem to be spending more on cars and housing related items, while shying away from other discretionary spending - including luxury items.

With the economy continuing to churn out jobs, interest rates still historically low and rapid home price growth continuing to boost household wealth across parts of the country, consumers are likely to make a comeback in the early months of 2017, but the support will not be as pronounced as in prior years.