When it's right it's right

Another month of “will they won’t they” is revealed on Wednesday evening as we get the latest Federal Open Market Committee’s decision on whether to fulfil their promise and raise interest rates for a second time before the year is out. One finds it hard to understand why they would not choose to act at this time, particularly ahead of the Bank of Japan’s meeting on Friday.

 

The US economy has continued to show signs of recovery in the past months, the Citi economic surprise index has risen to the highest level since January 2015. There have been fears in the past on the impact raising rates would have on Emerging Markets, but they too have shown signs of recovery in the past months. Emerging credit and the MSCI Emerging Markets indexes have both risen over 10pct this year.

 

Europe remains the basket case it usually is, but is certainly no more of a basket case than it was earlier in the year. The euro area composite Purchasing Managers Survey’s continue to reflect an expanding economy, even if a modest one. China’s macro data has stabalised, the devaluation of the Renminbi against the US dollar is not causing the shock waves across other markets in the way it did last August.  The concerns on Brexit could be waning, particularly its impact on the US economy. Indeed, one has to wonder if the UK remain voters are now becoming to think perhaps leaving won’t be so bad after all.

 

The Brexit vote given us what appears to be a very capable replacement to David Cameron, a new Chancellor of the Exchequer who may bring fresh ideas to stimulate the economy, and one of the sharpest brains in England as Foreign Secretary.

 

The main argument against moving this month seems to be that the market has not received any forward guidance from the Federal Reserve and therefore will not be prepared for such an action. According to Bloomberg the market only places a 40% chance of move in December, this is up from 8% a few weeks ago. 

 

It is possible that the Federal Reserve offer forward guidance at this meeting with the intent of moving in August, that could just create uncertainty. What has often happened in the past is the Fed suggest they are ready to pull the trigger, wait for a month, the equity market wobbles, a piece of mixed economic data is released and the Fed then bottle it. If they think the economic situation warrants a rise, they should just go for it, that’s our view. 

Posted on July 26, 2016 .