SOVEREIGN AND SUPRANATIONALSECTOR IN-DEPTH 19 December 2016ContactsIrina Baron Asst Dir-Research Associate irina.baron@moodys.comXian Li 212-553-1404Senior Research Analyst xian.li@moodys.comABOUT CAPITAL MARKETS RESEARCHAnalyses from Moodys Capital Markets Research, Inc. (CMR) focus on explaining signals from the credit and equity markets. The publications address whether market signals, in the opinion of the groups analysts, accurately reflect the risks and investment opportunities associated with issuers and sectors. CMR research thus complements the fundamentally-oriented research offered by Moodys Investors Service (MIS), the rating agency.CMR is part of Moodys Analytics, which is one of the two operating businesses of Moodys Corporation. Moodys Analytics (including CMR) is legally and organizationally separated from Moodys Investors Service and operates on an arms length basis from the ratings business. CMR does not provide investment advisory services or products.View the CMR FAQ Contact the CMR team Follow us on TwitterSovereign Risk ReportFed Rate Hike Tentatively Affirms US Economic Strength In response to the USs strengthening labor market and moderate expansion in economic activity, the US Federal Reserve Bank announced on December 16 its widely anticipated increase in the fed funds rate target from a range of 0.25% to 0.5% to a range of 0.5% to 0.75%. The first rate increase since December 2015 is a sign of confidence in continued growth for the worlds largest economy. The Fed also indicated that future increases would come quickly, potentially raising interest rates three times, to 1.4% by the end of 2017. Fed officials predict that the economy will expand by 2.1% in 2017 and the unemployment rate will fall from its current 4.6% to 4.5%. The rate of inflation is expected to increase only gradually from its current 1.6% to 1.9% in 2017 and potentially hitting the Feds target of 2% in 2018. However, Federal Reserve Bank president Janet Yellen suggested that the Fed would need to have time to wait and to see what changes occur under President Donald Trumps administration to factor those into the Feds future decision-making.Global market-based measures of credit risk were mixed this past week. Sovereign EDFTM (Expected Default Frequency) credit measures1 worsened in about a third of the countries in our dataset. As expected, countries more vulnerable to the strengthening US dollar and countries affected by low oil prices continued to show the weekly increases (see Figure 1 below). Chile showed the sharpest one-week increase in credit risk, with its one-year Sovereign EDF measure rising by 13%, followed by Indonesias and Argentinas respective increases of 9% and 7%. In China, fears that a rising dollar will destabilize trading in the yuan has sent the currency to 6.96 yuan per dollar, its lowest against the dollar in more than eight years, and raised concerns that capital outflows could increase. Chinas S...
