The Interest Rate Gamble

Dispositional Optimism: The Interest Rate Gamble

The long anticipated tightening of U.S. fiscal policy came to pass in the closing month of 2015 when Fed chair Janet Yellen announced an interest rate hike of 0.25% with gradual increases settling just shy of 4%. Markets reacted favourably to the news, viewing the announcement as a vote of confidence in the flagging US economy. Analysts supporting the move have even opined four further rate hikes over the year.

Not everyone is as optimistic though. While the decision to raise rates have been seen as a sign of economic recovery, other global economic trends paint a slightly different, and morose picture.

The second week of February saw global markets suffering a multi-day beating over concerns that the central banks’ optimism is misplaced. Worries over China’s slowdown, sinking oil prices and Bank of Japan’s decision to move interest rates to negative territory are in contrast against the Fed’s decision to hike up interest rates.

Japan’s move is seen as a desperate all-or-nothing gamble to jumpstart growth in a desperately weak Japanese economy by encouraging spending and incentivising banks to make loans. This tell-tale move by the BOJ is a strong sign Japanese growth may be far weaker than previously stated. It remains to be seen if such an unconventional measure will yield its intended effects or backfire into a market-led recession essentially weakening the Yen against the USD.

Across the Pacific, the UK’s growth figures have not fared much better either, suggesting an anaemic European economy at large. The ECB’s massive QE program launched in March 2016 makes no attempt to disguise the current malaise hitting the Old World. At the time of writing, the Euro is almost achieving parity with the USD, its lowest in 12 years.

Closer to home, the situation is even less encouraging. At the start of 2016, China devalued its currency’s midpoint rate a further 0.5% against the greenback, merely 5 months after the Yuan’s shock devaluation announcement last August. 2 week later, the Shanghai Composite Index shed 8.5%, its largest ever, in what has been called the ‘Asian Black Monday’.

Oil has also been the talk of town since late 2015. With oversupply hitting record levels, oil prices have tumbled from over USD$60 to its 10-year lowest of USD$26.55 per barrel (as of Jan 2016). As a result, an estimated 250,000 jobs worldwide have been cut from the oil industry so far, and this figure excludes the periphery knock-on effects on employment in semi-related industries.

With the global economy still struggling to gain momentum without any fundamental recovery indicators, one must wonder if the Fed’s rate hike runs counterintuitive to the needs of the global economic landscape. Bernie Sanders, presidential candidate for the Democrats seems to think so. All things considered, it is not farfetched to assume that Ms Yellen may pare, or even cut interest rates in the months forward as opposed to further hikes.

Disclaimer: These views are subject to change at any time based upon market or other conditions and are current as of date noted. While all material is deemed to be reliable, accuracy and completeness cannot be guaranteed.

The information, analyses and opinions set forth herein are intended to serve as general information only and should not be relied upon by any individual or entity as advice or recommendations specific to that individual entity. Anyone using this material should consult with their own attorney, accountant, financial or tax adviser or consultants on whom they rely for investment advice specific to their own circumstances.

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