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Global worries may stop US from raising interest rates

Jeremy Stewart is head of wealth management and private banking at Danske Bank

Published 15/09/2015

The US Federal Reserve may not raise the interest rates this week
The US Federal Reserve may not raise the interest rates this week

The daily moves in the stock market have been quite extraordinary of late, with a rise of 2% one day, quickly followed by a decline of 2% the next. Indeed, last week the Japanese market bucked the global trend and rose 7% in one day after a previous fall of 2.4%.

This is far from normal market behaviour. The market is showing no clear direction at the moment and is caught between cheaper valuations on the one hand and high uncertainty regarding the global economic outlook on the other.

Likewise, market analysts are struggling to decide on the true state of the Chinese economy and its impact on the impending decision on interest rates in the US.

Chinese data over the weekend confirmed the weaker than expected state of their economy, suggesting a slowdown in growth in the manufacturing and investment side of the Chinese economy and pointing to the need for further action from the government. This was reflected in the recurring weakness in Chinese stock prices at the start of the week.

But the main event this week will undoubtedly be the US Federal Reserve's meeting this week. This meeting will provide updated economic projections and a decision on interest rates.

Typically, the progress on the employment front and the solid economic growth data would point to a rate increase. However, rising uncertainty about the global economic outlook and the risk of spill-over to US growth means a rate hike is no longer a sure thing.

Furthermore, the downside risks of increasing rates early are seen by some to be more significant than the risks associated with a delay.

Many in the markets are now claiming that the first rate increase should be delayed until towards the end of this year, with current market pricing consistent with a 25 to 30% probability of a rate hike this week.

As we are in uncharted territory, this figure is closer to guesswork than a solid projection. Indeed, even the International Monetary Fund and the World Bank have weighed in to the debate, with senior staff from both organisations suggesting that, given the parlous state of parts of the global economy, US rates should not be increased on this occasion.

Whatever the decision, the real question is whether markets have correctly priced-in imminent rate rises.

Closer to home, some news has been more positive. A leading ratings agency, Moody's Investors Service, improved its view on Ireland from 'stable' to 'positive'.

Although falling short of a full re-rating, Moody's cited strong economic recovery, fiscal progress and a reducing government debt burden.

However, there was some caution on the last point, with the ratings agency noting that while debt is reducing in absolute terms, further progress is needed.

With the economic recovery well under way, Moody's indicated that Ireland's economy could grow by 3% to 3.5% per annum over the next three to five years.

Indeed, present growth is well in excess of 6%.

This is good news for Northern Ireland companies that transact business in Ireland and may encourage more locally-based firms to look south for opportunities.

Belfast Telegraph

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