Category: Markets

Why is a US interest rate rise such a big deal?

  • Interest rates (a key tool of monetary policy) are a fundamental driver of where the global savings that swish around the planet are parked.
  • Industrial world interest rates have been zero or close to zero for a while now - the US will be the first to raise rates.
  • So already have seen a global move towards buying US$ assets, hence US$ stronger - a rate rise will reinforce this trend.

Macrosnap Saudi oil strategy?

  • Oil price has more than halved in the last year, so as OPEC cartel leader, one would expect Saudi Arabia to cut output (and hence force the price up).
  • But instead they have chosen to maintain supply, despite the financial pain this is causing domestically.
  • Strategy is to prioritise its own long-term market share, and perhaps to inflict pain on fellow OPEC members Iran and Russia (who Saudi Arabia believes have destructive geopolitical ambitions in the Middle East).

Macrosnap of global monetary policy trends?

  • China growth slow: Central bank loosening.
  • Euro area growth looking dodgy: ECB considering further loosening.
  • US growth outlook uncertain: US seemed poised to tighten, but now might not seem so wise.

Snapshot of QE in Europe?

  • In very crude terms, when an economy slows, a central bank can try boost growth by lowering interest rates or by Quantitative Easing (QE), injecting cash (liquidity) into the economy (by buying bonds from the marketplace).
  • With interest rates super-low (and some even -ve), the ECB launched a massive QE programme in Jan '15, which involved buying EUR1.1tn of bonds from the marketplace, which is the same as a EUR1.1tn cash injection into the economy.
  • But China slowdown and uncertainty in emerging markets have created new growth concerns, so ECB considering expanding the QE program (next meeting in early December).

What is Monetary Policy?

  • Process by which the monetary authority (Central Bank) of a country or currency area, controls the supply of money.
  • The Central Bank usually targets an inflation rate or interest rate to maintain price stability and ensure trust in its currency.
  • Expansionary monetary policy is a recession-fighting tool, usually meaning increasing money supply faster than usual, typically by lowering interest rates.

When will Fed rate rise occur?

  • Two thirds of economists polled by FT expect it to happen in December.
  • Markets expect it to happen in 1Q16.
  • Unusually hard call to make as US growth data sending mixed messages amid noise created by strong $ and financial market volatility.

Oil price up again?

  • Has rebounded approx. 40% year-to-date.
  • So has reversed just under a third of the 2014 fall.
  • Expected that recent rise will run out of steam as US shale industry is rebounding strongly.

China interest rates down?

  • Interest rates being cut as central bank tries to boost growth (3rd cut in 6 months).
  • Rates expected to continue lower this year.
  • Growth slowing as China economy makes inevitable move from export-led smokestack industries to domestic-demand-led (consumption & services).

Structural shift in global economic system?

  • After WW2, US established Bretton Woods Institutions (IMF & World Bank) - by doing so it underwrote, and hence set the tone for the global economic system (post Cold War known as "Washington Consensus").
  • Over the last few years, due to pressures from the right, the US refused to give developing countries a bigger say in these institutions.
  • China has therefore set up rival institutions, and recently managed to get US allies to join - represents comprehensive failure of US strategy & tactics of global economic policy.

Macrosnap of the big one?

  • The biggest single structural issue in global financial markets for 2015 is the timing of the US Fed rate rise - a fundamental driver of where the global savings that swish around the planet are parked.
  • As the US is poised to tighten monetary policy (interest rates up) and most other major countries are loosening or neutral, the US$ has soared.
  • The health of the US job market is the key determinant of timing - 1Q15 was looking strong so markets expected rate rise in June, but recent job market numbers weaker - for dinner party kudos, fine to suggest it will happen between June and Aug :)
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