‘Don’t Expect Next Fed Rate Hike Until 2018’
The US Federal Reserve is unlikely to raise interest rates until 2018, said Michael Sneyd, forex strategist at BNP Paribas. He said the Fed may consider a rate hike only if the US economy does exceptionally well, but such a move could upset equations, choking fund flows. Sneyd spoke to Saikat Das and Pratik Bhakta during his recent India visit. Edited excerpts:
What worries the world markets? The biggest focus over the last few weeks has been the Fed and its move to be more dovish.
What signals are you getting from the Federal Reserve? A few weeks ago, Fed chief Janet Yellen said the way the Fed views the world has been unchanged. But the downside risks to the US economy have increased. Most of the downside risks stem from what is happening in foreign economies. It also extends from what is happening in global markets. She also made the point that it is a lot easier for a central bank to cool down an overheating economy than it is to stimulate an economy that is not doing well enough. This shows that the Fed is concentrating on the downside risks as part of its core view.
What is your take on a rate hike by the Federal Reserve? We do not expect next Fed rate hike until 2018. If the data around the US appear to be strong and the equity markets remain stable, then the Fed might care for a rate hike. However, if they do a rate hike, then it would be an opportunist rate hike to take advantage of the market conditions.
So, will the Fed turn opportunist? I think over the next nine months, the chances of that are quite low. The next June meeting is around the UK referendums, the next Fed meeting will be in September that would be just before the US elections. The shift in the focus has been on downside risks and they mostly stem from abroad. Actually, the US economic outlook remains quite firm.
What are top three global concerns for emerging markets? If the US economy does exceptional- ly well and the Fed hikes rates, that would be a major concern. Moreover, the UK’s referendum (on its EU membership) is a major concern in Europe. The third point should be China. We do not expect anything dramatic from the growth side of China. The worry is around China’s devaluation. If the PBoC (People’s Bank of China) decides to do something regarding devaluing their currency that could have possible implications on the global market.
FED’S NEXT MOVE
Will PBoC be prompted to take any such step? We don’t think the PBoC has any plans for a sharp devaluation of the currency. In terms of how the currency has been moving, a lot of our focus has been on the switch of PBoC’s policy of managing dollarrenminbi to managing the renminbi on a basket basis. Because we have had a period of dollar weakness on a trade weighted basis, the renminbi could depreciate while dollar-renminbi has remained stable. The silence of the PBoC is more a reflection that the dollar has started to move lower, which means that the renminbi has become weaker versus the likes of the euro and the yen rather than due to the G-20.
Will this affect overseas fund flows into emerging markets like India? From a flows perspective, India is the economy which people like because of the structural story, whereas flows to the other parts of Asia tend to be tied to risk aversion. When the expectations have been for the Fed to hike rates, the people would not want to put their money into the emerging markets. Therefore, flows dry up particularly in the South East Asian countries, but India is an economy which is differentiated and it keeps getting flows whether the market is in a risk on or off mode.
Are India bond yields still attractive for foreign inflows? This attractiveness is also due to the fact that inflation in India is coming under check. Foreign investors like that. Thus, the real return on Indian assets still remains very strong. The kind of the stage that it is in its development cycle, keeps India attractive. In India, there are a lot of low-hanging fruits in terms of improving the infrastructure and the government has been very committed to that. I would say there is a bit of disappointment about the progress of development, but if there is a time when this would be done, it would be done by this government.