I appeared on Channel News Asia again this morning at 8:30am SGT from their OCBC Centre studio. My questions and my responses in the form of brief notes are below:
Q1. Today’s release of central bank policy meeting minutes, do you see prospect of a rate cut in November?
All year we have been discussion this decision by the Fed, and I think we are getting closer, aren’t we?
Prior to last week’s jobs data I would have probably said no, however with it coming in strongly, the tide has turned and the market is expecting around 70% chance of a move.
Another Federal Reserve official pointed to December as an appropriate time to begin raising U.S. interest rates, as Eric Rosengren said on Monday there has been “real improvement” in the economy of late with the October jobs report delivering “very good news.”
Previously we have heard Janet Yellen cite concerns global growth, especially China and Europe however she has eased off on that line a little of late, also pointing towards a rate rise.
However many things can happen in the next few weeks. What if the market is sold off strongly? Then concerns about the Fed raising rates and stocks are down 10%, you could easily see the Fed waiting until next year.
Q2. Will the kind of rate lift off the Fed is trying to engineer be more like a kite than a rocket (refering to pace of rate hike)?
I think that is a good question.
The Fed have been at pains all year to stress that the timing of the first rate rise is not that important. It is what happens afterwards and the path that the Fed takes that is much more important.
I think this is being a lost a little as we are tending to focus so much on the first rate rise.
With that in mind, if it doesn’t commence next month, it probably won’t be too long into the new year before they do make a move.
Q3. What can we expect from Wall Street for the rest of the year, with the Fed rate hike looming?
I think we could easily see a solid rally leading into the Christmas period. This move has been anticipated all year and is seen as an endorsement of the US economy by the central bank – this should be seen as a positive move and therefore is likely to lift consumer confidence and see some bullishness in US stocks.
It has enjoyed a solid run over the last month or so however it has also run into a wall of resistance just above the 18000 level which has held it back for the best part of this year, so any surge may be capped a little.
Q4. After a “pristine” jobs report last Friday, can we expect the US dollar to break out and the euro to reach parity and beyond by the end of this year?
We have already seen some strength in the US dollar since late last week which has seen pressure on the Australian dollar, gold, Euro etc.
Also, throughout most of this year we have seen US dollar strength so whilst we may see a strong surge in the US dollar should the Fed raise rates, I wouldn’t expect it to last as it has mainly been priced in already.
Q5. What about the impact on commodity currencies like the Australian and New Zealand dollars from a Fed rate hike?
Similar to the Euro. The US Dollar has moved well this year and currencies like the Australian and NZ dollar have been under intense selling pressure at times.