The US Dollar and The Interest Rates

   Schwaben Blog

September 25, 2015

Weekly Statistics:

Today Week Ago Year Ago
25-Sep-15 18-Sep-15 25-Sep-14
S&P TSX 13,380 13,646 15,026
S&P 500 1,931 1,958 1,965
DJIA 16,315 16,385 16,945
OIL $45.58 $44.92  $89.37
USD vs CAD 0.7507 0.7604 0.9051
Gold $1,146 $1,138  $1,226

After deciding to keep interest rates steady during the last meeting, the Federal reserve chairperson, Janet Yellen, commented yesterday that most members on Federal Open Market Committee (FOMC) still expect a rate increase in 2015. She also said that “Prospects for the US economy generally appear solid”. Her comments are supported by this morning’s report from the Commerce department, which states that the US economy grew at an annual rate of 3.9 percent compared to the previous forecast of 3.7 percent. A significant correction in oil prices could also be partially responsible for this stellar growth. This boosted the confidence of investors after the last FOMC meeting gave them some jitters about the growth of the US economy. Most of the major economic indicators are pointing towards a healthy and growing economy, and raising interest rates by 25bps would not prove catastrophic. Although there could  be a short-term correction in equity markets, a hike in interest rates would  signal that the US economy is strong enough to absorb a rate hike after almost a decade, however this does not alleviate the concern of falling inflation especially with a rise in interest rates. A stronger dollar could also  lower inflation as it suppresses import prices. The US dollar index, which measures the performance of US dollar against a basket of six currencies, has significantly appreciated on a year-over-year basis and is almost at the highest level for a decade resulting in disinflation for US consumers.

Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics

A Rate Hike This Year?

   Schwaben Blog

 

September 18, 2015

 

Weekly Statistics:

  Today Week Ago Year Ago
  18-Sep-15 11-Sep-15 18-Sep-14
       
S&P TSX 13,646 13,478 15,265
S&P 500 1,958 1,961  2,011
DJIA 16,385 16,431 17,265
OIL $44.92 $44.79  $89.75
USD vs CAD 0.7604 0.7544 0.9051
Gold $1,138 $1,106  $1,232

 

The latest Federal Open Market Committee (FOMC) meeting concluded on September 16 and during the meeting the committee voted 9-to-1  for keeping the interest rates steady. The Federal Reserve chairwoman said that the Fed considered hiking interest rates on Thursday but because of the increased uncertainties abroad and the slightly softer expected path for inflation, the committee judged that it is appropriate to wait for more evidence. Although the US economy is growing at an impressive rate but due to significant correction in oil prices and appreciation of dollar, the inflation is much lower than the Fed’s target rate of 2 percent. Even the core inflation rate, which strips out the volatile items like energy, is still below 2 percent at 1.8 percent. There are two more FOMC meetings scheduled for this year in October and December. As there is no press briefing planned for the October meeting, so analysts and economists are pointing towards a rate hike in December. According to CME FedWatch tool, the probability of a rate hike in October is only 16% whereas in December the probability is 42 percent. The major indices in US and Canada are already down more than 7 percent this year and a rate hike at this time will only make the losses worse. I would still believe that a rate hike this year does not look imminent and the Fed should wait for inflation to settle around their target, otherwise the US economy may run into deflation.united-states-inflation-cpi

Interest Rates- Will They or Will They Not?

   Schwaben Blog

September 11, 2015

Weekly Statistics:

Today Week Ago Year Ago
11-Sep-15 04-Sep-15 11-Sep-14
S&P TSX 13,478 13,478 15,534
S&P 500 1,961 1,921  1,997
DJIA 16,431 16,102 17,049
OIL $44.79 $45.37  $91.55
USD vs CAD 0.7544 0.7564 0.9137
Gold $1,106 $1,122  $1,281

The Federal Open Market Committee (FOMC) is meeting  on September 15-16 to decide the course of interest rates for the US economy but after the recent turbulence in Chinese economy, devaluation of Yuan, and extreme volatility in equity markets, the chances of an interest rate hike by the Federal Reserve are minimal. According to the CME FedWatch tool, there is a 24 percent probability of a rate hike in September and 38 percent probability in October. The former Dallas Fed president, Richard Fisher is one of the few economists who are calling out the Fed to raise the interest rates before it’s “too late”. According to him, the Dallas Fed’s measure of inflation, the trimmed mean rate, has been running steadily at 1.6 percent over the last year and if Fed were to focus on this measure then they would have little problems raising interest rates. But the overall inflation rate is still well below Fed’s target rate of 2 percent and even if we look at the core inflation rate, which strips out the volatile items like energy, it is still below 2 percent at 1.8 percent.

It  is also worth mentioning that 2015 is the third year in the presidential cycle and historically third year has been very good for markets. Since 1940, the Dow Jones Industrial Average (DJIA) has risen in 100 percent of the third years and gained an average of 22.3 percent. So far, the year-till-date return for DJIA is around -8% and if interest rates are hiked in the next meeting then equity markets are almost certain to suffer more losses, at least in the short term. We believe that the decision to hike interest rates is becoming more political than data driven. According to some un-named sources, Janet Yellen met President Obama 45 times over the last year. This clearly shows that the President is actively monitoring the Fed’s decision making progress and will not rush into raising interest rates like Japan did in early 2000s, which led the Japanese economy into a deflationary environment.