US econ­omy re­mains in con­tention for a Fed rate hike

Financial Mirror (Cyprus) - - FRONT PAGE -

Global mar­kets re­main abuzz with the pos­si­bil­ity of a Septem­ber rate hike in the U.S. How­ever, re­cent state­ments by key in­di­vid­u­als and pol­i­cy­mak­ers have con­fused traders as to the tim­ing and scope of a rate hike. Just the other day, the dovish Pres­i­dent of the Bos­ton Fed­eral Re­serve Bank al­luded to no spe­cial ur­gency in opt­ing for a rate hike just now. Dr Eric Rosen­gren has not given his bless­ing to a Fed rate hike in Septem­ber, but he al­ludes to the need to see in­fla­tion hit­ting the Fed’s 2% an­nual rate.

Presently, there is too much slack in U.S. labour mar­kets to ex­pect higher in­fla­tion. How­ever, the Labour Depart­ment re­leased a re­port with up­ward re­vi­sions (245,000) for each of the months of June and July, but a much weaker jobs growth in Au­gust. The luke­warm re­port was enough to buoy dol­lar sen­ti­ment, and more im­por­tantly the un­em­ploy­ment rate in Au­gust de­clined to a 7-year low. Econ­o­mists had been fore­cast­ing an in­crease in Non-Farm Pay­roll em­ploy­ment of 220,000 jobs in Au­gust, but the ac­tual num­ber was markedly lower at 173,000.

In July, the un­em­ploy­ment rate in the U.S. was 5.3%, but in Au­gust the num­ber de­clined to 5.1%. Such is the pos­i­tive feel­ing about the world’s largest econ­omy that the Pres­i­dent of the Rich­mond Fed­eral Re­serve – Jeffrey Lacker – has been hint­ing at rais­ing the Fed in­ter­est rate re­gard­less. But an in­ter­est rate hike in the U.S. is likely to have dire con­se­quences for global mar­kets, no­tably emerg­ing mar­ket economies. As talk of a U.S. rate hike gains favour, for­eign coun­tries ex­change their cur­ren­cies for the USD. This bol­sters the strength of the green­back and weak­ens other cur­ren­cies.

Emerg­ing mar­ket coun­tries like BRICS (Brazil, Rus­sian, In­dia, China and South Africa) coun­tries have suf­fered im­mea­sur­ably over the past sev­eral months. This is par­tic­u­larly true in the sense that mas­sive cap­i­tal flight has been tak­ing place. Brazil is in fi­nan­cial ruin with its Pres­i­dent at just 8% ap­proval and no sup­port in Congress; Rus­sia is in a quag­mire, China has gone into melt­down and the South African min­ing and energy sec­tors have all but col­lapsed and taken the cur­rency down with them. Dur­ing times of eco­nomic un­cer­tainty, it is the emerg­ing mar­ket economies that face a loss of con­fi­dence.

The dol­lar has made strong gains against mul­ti­ple cur­ren­cies in­clud­ing the GBP (1.5187), the EUR (1.1102), the JPY (119.3500) and the CHF (0.9739). The dol­lar made even stronger gains against a bas­ket of cur­ren­cies be­fore meet­ing strong re­sis­tance and de­clin­ing to present lev­els.

Against the AUD, the USD hit a 6.5 year high of 0.6928 and against the NZD it is chal­leng­ing the key 0.61 re­sis­tance level. It is cur­rently trad­ing at 0.6340. But what’s good for cur­ren­cies is not nec­es­sar­ily good for eq­ui­ties. Now, in­vestors are try­ing to fig­ure out pre­cisely when the Fed rate hike will take place. The S&P 500 In­dex slipped 1.5% in NY af­ter the jobs re­port. The DJIA slipped 1.6% af­ter the re­port. This is now the sixth such de­cline for the S&P 500 In­dex in just un­der two weeks.

The month of Septem­ber is one of the worst for the S&P 500 In­dex with an av­er­age de­cline of 1.1%. Some of the many pos­i­tive fac­tors that are now work­ing against the stock mar­ket are the fol­low­ing: - Pay­rolls have in­creased; - June and July em­ployed was re­vised up­wards; - Low­est un­em­ploy­ment rate since April 2008 – 5.1%; - Hourly earn­ings have in­creased and more work­ers are work­ing longer.

Come Septem­ber 16-17, the FOMC will se­ri­ously be con­sid­er­ing meet­ing its 2% an­nual in­fla­tion rate by way of an in­ter­est rate hike in the re­gion of 0.25 points. The like­li­hood of such a rate hike has spiked from 28% to 36% given the jobs re­port. For now, it’s go­ing to be another week of high volatil­ity un­til the Septem­ber meet­ing is over. Stocks are go­ing to come in for some se­ri­ous tap and the USD is likely to en­joy a short-term surge un­til Janet Yellen, Stan­ley Fis­cher and pol­i­cy­mak­ers post their re­port.

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