Tags: investors | worry | more | fed | rate | hike

Investors May Worry Even More If Fed Doesn't Hike Rates

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Tuesday, 18 December 2018 10:15 AM Current | Bio | Archive

Fed’s Rate Strategy

U.S. equity markets had another bad day Monday with growth fears being blamed in the extended context of problems over international trade, which disproportionally affects equities.

The interesting thing is that apart from a month or so of positive growth surprises at the start of this year, the U.S. economy has performed exactly as it was expected to perform.

For example, U.S. growth surprise indexes weighted by the importance of data releases have shown that the economic consensus has had almost no surprises at all this year. The less important U.S. data have in fact done a little bit better than expected of late.

Outside of the U.S., Asia has had a few small disappointments but nothing at note and not very many. Emerging markets have been peacefully as expected albeit in a somewhat volatile way. Only Europe has really disappointed on growth as one off factors like for example the German autosector have created some negative surprises.

In short, global growth has slowed from the tax-cut sugar high of above-trend growth to trend growth. What else would anyone like to expect to happen?

Investors, however, are clearly nervous.

The Federal Reserve is in an interesting position.

Economically, there is no reason to do anything other than to raise U.S. rates on Wednesday. The Fed has been hinting that a rate hike is planned. The equity-market volatility shouldn’t change that.

But if the Fed doesn't hike rates, how would markets react? 

There is a good case for suggesting that investors would worry, either fearing that the Fed has knowledge of something the market doesn't know, or fearing that President Donald Trump’s rather strong attempts to influence the Fed has created political risk.

Central-bank independence is one of the very foundations for a stable inflation environment that markets like.

One factor that might argue for less action by the Fed is the lower oil price, which reduces headline inflation.

However, lower oil prices tend to disproportionately stimulate the U.S. consumer and at a time of rising wage pressures that might call for more action by the Fed rather than less.

The oil price move was driven primarily by supply rather than by weaker demand. So, it does not on itself signal much about economic activity. 

China's Xi Jinping Tries to Bolster Confidence in His Leadership

China President Xi Jinping said in a speech marking the 40th anniversary of the opening up of the Chinese economy: “No one is in a position to dictate to the Chinese people what should or should not be done. We must resolutely reform what should and can be changed, we must resolutely not reform what shouldn’t and can’t be changed.”

There was no real discussion on trade or significant reform other than a rather bleak reference for the fact that no one else should tell China what to do.

Xi identified three battles:

  • Against pollution,
  • Against poverty and
  • In favor of financial reform.

Stirring stuff, but arguably this doesn’t deal with the more fundamental problems that China faces.

The model on which China’s success has been built cannot continue to work.

China succeeded by becoming part of longer and longer supply chains at just the moment that globalization was encouraging outsourcing. Having established itself as part of these more complex supply chains, China then sought to move to higher value added links in the chain.

The problem with this model is that globalization is now “peaking.”

That has nothing to do with President Trump’s trade tariffs.

Instead, this has to do with technology supply chains and localizing productions.

In the future, trade innovation and raw materials is likely to outperform where does trade and manufacturing at any state of the value chain is likely to underperform.       

Brexit Saga Continuous

The British tradition of Christmas pantomime continues. Opposition Labor leader Jeremy Corbyn tabled a motion of no confidence in the Prime Minister but not in the government. Corbyn effectively signaling a preference for another Conservative Prime Minister.

The government will not allow the motion and said that it is no confidence in the government or nothing.

Meanwhile, the British cabinet is to meet to accelerate plans for a “No” deal exit from the European Union (EU), which probably should be taken as “political posturing,” the BBC reported.  

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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There is a good case for suggesting that investors would worry, either fearing that the Fed has knowledge of something the market doesn't know, or fearing that President Donald Trump’s rather strong attempts to influence the Fed has created political risk.
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Tuesday, 18 December 2018 10:15 AM
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