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Fed Meets Amid Elevated Rate Hike Expectations

The D-day is upon us, as the markets wait with bated breath whether the Fed will be moved into action by recent economic data, which vouch for a strong momentum. Fed speeches have left open the possibility of another 25 basis point-increase before the year end.

However, some analysts believe that a Fed hike might not move the market this time around, as they have begun discounting a huge stimulus injection from the incoming administration and further tax cuts. There a small move, the second in about 10 years may be shrugged off by the markets. Since things are still fluid concerning policies in the New Year, the Fed is unlikely to maneuver much with its forecasts.

Among the economic data released last week, the results of the Institute for Supply Management’s national non-manufacturing survey showed optimism. The non-manufacturing index rose 2.4 points to 57.2 in November, while economists expected a more modest increase of 0.7 points.

The trade deficit for October widened more than expected to $42.6 billion from a deficit of $36.2 billion. This reflected a 1.8 percent drop in exports but a 1.3 percent increase in imports.

Non-farm productivity was up an unrevised 3.1 percent sequentially in the third quarter, marking the highest reading since the second quarter of 2015. Output increased 3.6 percent, but slower than the 3.8 percent increase in compensation. Unit labor costs were up 0.7 percent, more than the 0.3 percent increase estimated initially.

Jobless claims fell less than expected and factory orders for October rose in line with expectations. Preliminary consumer sentiment reading compiled by the University of Michigan climbed to 98 in December from 93.8 in November, while economists expected a reading of 94.1.

Click on for details on what to watch for on the Main Street front in the unfolding week:

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Chile's GDP To Expand Moderately In 2017: IMF

Chile’s economy is set to expand moderately next year, the International Monetary Fund said Friday.

The Executive Board of the IMF said gross domestic product is forecast to grow 2 percent next year after expanding 1.7 percent this year.

Faster growth in main regional partners and more stable copper prices are expected to lift exports and investment. However, the recovery is projected to be gradual, held back by slow wage and job growth.

On price front, IMF said inflation will continue to decelerate to 2.7 percent next year.

The lender recommended a policy mix that supports short-term growth and emphasizes building on an already-strong structural reform agenda capable of boosting the economy’s medium-term growth potential.

The IMF advised Chile to maintain supportive monetary policy and to keep fiscal consolidation appropriate to retain credibility.

In order to increase potential growth, the IMF urged the authorities to create a new Infrastructure Fund to attract private capital.

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Fitch Lowers Mexico's Rating Outlook To Negative

Fitch Ratings downgraded Mexico’s rating outlook to ‘negative’ from ‘stable’, while the rating was affirmed at ‘BBB+’.

The revision in outlook reflected increased downside risks to the country’s growth outlook and the challenges this could pose for stabilization of the public debt burden.

The victory of Donald Trump in the U.S. presidential election has increased economic uncertainty and asset price volatility in Mexico, Fitch observed. Trump has alluded to renegotiating or terminating the North American Free Trade Agreement (NAFTA) with Mexico and tightening immigration controls.

The agency cited that Mexico’s moderate growth profile was a rating weakness. Moreover, public finances have been facing pressure from the decline in oil income.

Nonetheless, Fitch said Mexico’s ‘BBB+’ ratings are supported by the country’s diversified economic base and a track record of disciplined economic policies that has anchored macroeconomic stability and curbed imbalances.

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Fitch Affirms Sovereign Ratings Of UK, France

Fitch Ratings maintained the sovereign ratings of the U.K. with a ‘negative’ outlook, while France’s rating was affirmed with ‘stable’ outlook.

The agency kept the U.K.’s credit rating at ‘AA’ on Friday. The ratings balance a high-income, diversified and advanced economy against comparatively high public sector indebtedness, the agency said.

Fitch noted that deep capital markets and sterling’s international reserve currency status and high governance and human development indicators further support the ratings. However, the ‘Brexit’ vote has ushered a period of heightened uncertainty.

The rating agency also affirmed Bank of England’s rating at ‘AA’ with a ‘negative’ outlook.

In a separate communique, the agency said France’s credit rating remained at ‘AA’.

The ratings balance a wealthy and diversified economy, track record of relative macro-financial stability, strong and effective civil and social institutions with a high general government debt/GDP ratio and fiscal deficit, Fitch said.

The rating was underpinned by its strong financing flexibility, as a core Eurozone member with access to the Eurozone’s deep and liquid capital markets, and with government debt entirely denominated in euros.

The stable outlook suggests that Fitch does not expect developments with a high likelihood of leading to a rating change.

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Spain's Leading Index Improves In October

Spain’s leading index that signals future course of economic activity strengthened in October, the Conference Board reported late Friday.

The leading economic index rose 0.4 percent in October from September, when it grew only by 0.2 percent. This was the fourth consecutive increase in the score.

Similarly, the coincident index, which reflects the current economic activity, climbed at a faster pace of 0.2 percent, following a 0.1 percent rise in September.

During April to October, the leading index gained 0.9 percent and the coincident index rose 1.1 percent.

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Americas Roundup: Euro Drops for Second Day After Dovish ECB Meeting, Oil Edges up About 1 Pct on Optimism Over Non-Opec

Market Roundup

•    University of Michigan Dec Sentiment (prelim) 98 v forecast 94.5, 93.8 previous. •    University of Michigan Dec Conditions (prelim) 112.1 v forecast 108.5, 107.3 previous. •    University of Michigan 1-yr inflation 2.3% v 2.4% previous, 5-yr inflation 2.5% v 2.6% previous. •    Euro drops for the second day after dovish ECB meeting, Italian banking woes add to weakness. •    ECB rejects Monte de Paschi's request for more time to raise cash; pressure on Rome to recapitalize the bank, avert the risk of crisis. •    ECB discussed bolder stimulus before compromise, some sought extension of EUR 60 billion for 12-month. •    Euro zone needs more risk-sharing, euro zone budget would help-ESM's Regling. •    Fitch revises outlook on Mexico to negative, affirms IDRS at ‘BBB+’. •    Brazil's inflation eases much more than expected in Nov, IPCA inflation Index 6.99% v 7.08% forecast. •    Gold set for 5th weekly drop on dollar, U.S. rate prospects.

Looking Ahead – Economic Data (GMT)

•    23:50 Japan Corp Goods Price MM Nov forecast 0.3%, -0.1%-previous •    23:50 Japan Corp Goods Price YY Nov forecast -2.3%, -2.7%- previous •    23:50 Japan Machinery Orders MM Oct forecast 1%, -3.3%- previous •    23:50 Japan Machinery Orders YY Oct forecast -4.5%, 4.3%- previous

Looking Ahead – Events, Other Releases (GMT)

•    No Significant Events

Currency Summaries EUR/USD is likely to find support at 1.0500 levels and currently trading at 1.0548 levels. The pair has made session high at 1.0580 and hit lows at 1.0529 levels. The euro declined against the dollar on Friday for the second consecutive day after the European Central Bank on Thursday extended its bond-buying program longer than many had anticipated, even as it cut the size of the monthly purchases. The ECB said it would reduce its monthly asset buys to 60 billion euros starting in April from 80 billion euros currently and extend purchases to December from March. It reserved the right to increase the size of purchases again. Underlying its promise for extensive stimulus, the ECB predicted inflation at 1.7 percent in 2019, arguing that more-costly energy could boost consumer prices even without lifting the underlying trend. The euro dropped to $1.0548, its lowest since Monday, and was last down 0.47 percent at $1.0566. The dollar gained 0.37 percent to 101.47 against a basket of six major currencies. Against the Japanese yen, the greenback increased as high as 115.27 yen, its highest since Feb. 9, and was last up 0.76 percent at 114.86 yen. GBP/USD is supported in the range of 1.2458 levels and currently trading at 1.2564 levels. It reached session high at 1.2592 and dropped to session low at 1.2548 levels. Sterling declined against the dollar on Friday as sterling was weighted down after investors hopes for a delayed Brexit dampened after British lawmakers said they would stick to Prime Minister Theresa May's timetable. The currency was briefly lifted in the morning by data showing Britain's trade deficit narrowed more than expected in October. But by 1630 GMT sterling was trading 0.1 percent down on the day at $1.2577. For the week, it was 1.2 percent lower against the dollar, having also been hit by weaker-than-expected industrial output data. Sterling climbed 0.7 percent to 83.80 pence against a euro that was trading down across the board after the European Central Bank's extension of its asset-purchase programme. The pound is trading about 15 percent lower against the dollar after Britain voted to leave the European Union and about 10 percent weaker against the euro. USD/CAD is supported at 1.3150 levels and is trading at 1.3175 levels. It has made session high at 1.3188 and lows at 1.3150 levels. The Canadian dollar strengthened against its U.S. counterpart on Friday, with the risk-sensitive commodity-linked currency outpacing broader gains for the greenback as oil and stocks climbed. The loonie is on track to rise for the second straight week despite the Bank of Canada on Wednesday pointing to “significant” slack in the Canadian economy as it held interest rates steady. Higher prices for oil, one of Canada's major exports, have helped support the Canadian dollar after last week's output cut agreement by members of the Organization of the Petroleum Exporting Countries. U.S. crude prices were up 0.92 percent at $51.31 a barrel on hopes that non-OPEC producers meeting in Vienna would also agree to cut output. The Canadian dollar was last trading at C$1.3178 to the greenback, or 75.90 U.S. cents, stronger than Thursday's close of C$1.3191, or 75.81 U.S. cents. AUD/USD is supported around 0.7413 levels and currently trading at 0.7448 levels. It hit session high at 0.7477 and made session lows at 0.7434 levels. The Australian dollar declined against US dollar on Friday after the dollar was boosted by expectations that U.S. Federal Reserve will raise interest rates for the first time this year.  A resurgent U.S. dollar has been pushing basket of currencies lower as the market continued to bet that Trump's administration will increase debt-funded spending and spur higher growth and inflation. The U.S. Federal Reserve is widely expected to raise interest rates for the first time this year when it meets next week but may take a cautious tone on the economy. Traders will focus on the Fed’s economic projections, known colloquially as the dot plot, for indications of any change in expectations following Donald Trump's surprise election as U.S. president on Nov. 8. The Australian dollar resisted the dramatic falls against the dollar as the strength in commodities prices limited Aussie dollar’s decline. The Australian dollar was last trading $0.7449, away from daily high of $0.7496 touched early in the European session. Equities Recap European shares rallied near 11-month highs on Friday after a strong week, helped by gains among media companies after a takeover bid ignited Sky's shares, though Italian banks were under pressure. The UK's benchmark FTSE 100 closed up by 0.3 percent, FTSEurofirst 300 ended the day up by 1 percent, Germany's Dax ended up by 0.3 percent, and France’s CAC finished the day up by 0.7 percent. Major U.S. stock indexes powered to another day of fresh record highs on Friday, with the S&P 500 ending the week up 3 percent, as investors bid up shares in sectors that have lagged in the month-long rally since Donald Trump's presidential election. Dow Jones closed up by 0.72 percent, S&P 500 ended up 0.58 percent, Nasdaq finished the day up by 0.49 percent. Treasuries Recap  U.S. Treasury yields climbed on Friday with benchmark yields marking a fifth consecutive week of increases on stronger-than-forecast data on China inflation and U.S. consumer sentiment ahead of $56 billion in government debt supply next week. The benchmark 10-year Treasury note yield was last at 2.467 percent, up 8 basis points from Thursday and not far from a near 1-1/2 year peak set on Dec. 1. The yield on 30-year bonds touched 3.171 percent, its highest since July 2015 before edging down to 3.159 percent in late trading, up 7 basis points on the day. Commodities Recap Gold fell to its lowest in 10 months on Friday as the dollar and global equities rose, and was headed for a fifth straight weekly decline on expectations of a Federal Reserve interest rate hike next week. Spot gold was down 1 percent at $1,158.54 an ounce by 2:48 p.m. EST (1948 GMT), after falling to $1,156.05, the lowest since early February, as U.S. 10-year Treasury yields hit session highs. U.S. gold futures for February delivery settled down 0.9 percent at $1,161.90.

Oil prices rose about 1 percent on Friday on hopes that non-OPEC producers meeting in Vienna over the weekend would agree to output restrictions to go along with the limits OPEC announced last week to curb a glut of oil. U.S. crude's West Texas Intermediate (WTI) futures ended the session at $51.50 a barrel, up 66 cents, 1.30 percent after trading narrowly between $50.86 and $51.66 Brent crude closed up 44 cents, or 0.82 percent, at $54.33 per barrel after dealing between $53.77 and $54.46.

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