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Fed's First Small Rate Step Will Be Giant Leap for Markets

Fed's First Small Rate Step Will Be Giant Leap for Markets
(Dollar Photo Club)

Monday, 23 November 2015 09:41 AM Current | Bio | Archive

The  Chicago Mercantile Exchange (CME) Fed Watch tool indicates now a 73.6 percent probability of a Fed rate hike in December of 0.50 percent and a 26.4 percent probability of a 0.25 percent hike.

On the subject San Francisco Fed President John Williams, considered as a centrist on Fed policy said: “The data I think have been overall encouraging, especially on the labor market … Assuming that we continue to get good data on the economy, continue to get signs that we are moving closer to achieving our goals and gaining confidence getting back to 2-percent inflation ... If that continues to happen there's a strong case to be made in December to raise rates."

St. Louis Fed President James Bullard, who is considered hawkish, said: “I think we are going to return to an era where there is a bit more uncertainty about what the (Fed's policy-setting) committee is going to do meeting to meeting … I would welcome the return of that because to me that's normal monetary policy.”

Finally, New York Fed President William Dudley, who is considered a dove, said: “We hope that relatively soon we will become reasonably confident that inflation will return to our 2 percent objective.” Dudley added that it was “very logical” to expect that the Fed's inflation and employment conditions would be met “soon” to allow it to “start thinking about raising the short-term interest rates.”

So, when we add to these statements what ECB’s President Mario Draghi said on Friday: “We will do what we must do to raise inflation as quickly as possible,” there should be very little doubt the ECB will ease further on December 3 and the Fed will hike on December 16.

I wouldn't underestimate these two moves of the world's two most important central banks.

Yes, that long-awaited first small step of the Fed could mean, and in my opinion will mean, a giant leap for the markets.

Between December 3 and December 16, we could see further upward pressure on the dollar that goes together with a lot of things that move in the other direction, but please take care because when the Fed finally will raises its fed funds rate we shouldn’t be surprised to see the dollar loosening some steam because of "Buy the rumor, sell the news" phenomenon. If that would be the case we could see various “short and brisk” upward moves in various commodities and currencies that have all have had, so far at least, an awful 2015 written in “red.”

Investors should remain cautious because there are very few reasons why the dollar bullish run should reverse over the short term. Median to longer term is another question.

Yes, there is still a greater probability than not the euro could dip below parity with the dollar in 2016, crude oil (WTI) could dip below the $30 mark and even reach the $20 dollar zone where it probably wouldn’t stay for long, gold could further drop to and even below the $1,000 per ounce and copper could drop further to or even through the $4,500 per ton zone. A good bottom price reference for commodities is their cash cost, which for oil is about $20.

It always makes sense for any balanced portfolio to have part of its allocations in commodities.

As for commodities, the overall trend remains downwards because we are still in what's called the “Third Wave” of the global financial crisis of 2008 that started in the U.S., then moved to the European sovereign crisis and now has ended up in the still ongoing emerging markets slowdown.

As long as world growth and especially growth in emerging markets doesn't start expanding again, an overall healthy price rebound of commodities is very unlikely.

The time will come where the situation will get better, which will be buying time again, but we aren’t there yet. Not by a longshot.

Anyway, various economists give some hope as they expect global growth in 2016 to be a little bit better than this year and which Goldman Sachs’ research team expects it to come in at 3.2 percent.

As long as growth doesn’t start returning back on a broad-based scale, commodity prices are at risk remaining low and could go even lower than where they are today.

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No doubt, the time will come where the situation will get better, which will be buying time again, but we aren’t there yet. Not by a longshot.
economy, fed, rates, investors
Monday, 23 November 2015 09:41 AM
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