 "Global growth concerns are likely to remain a drag on markets: Philip Marey")
Post the recent US Federal Reserve (US Fed) policy review in October, New York-based Philip Marey, senior US strategist, Rabobank International, tells Puneet Wadhwa that they stick to their earlier forecast of a lift-off in December 2015. Going ahead, emerging economies will have a hard time dealing with both the Chinese growth slowdown and the US Fed's hiking cycle, he says. Edited excerpts:
What are your key takeaways from the recent meeting of the US Federal Reserve (US Fed)? Do you still stick to your earlier stance of a rate hike in the December review? Why?
As widely expected, the Federal Open Market Committee (FOMC) did not hike rates in the recent review meeting. However, they did leave the door open to a December rate hike. We might say 'wide open'. The repetition that the committee would like to see 'some further improvement' in the labour market and it would like to be 'reasonably confident' that inflation will move back to its two per cent objective over the medium-term was not surprising. This has left the door open to a December hike.
They repeated that labour market indicators show that underutilisation of labour resources has diminished since early this year. This is in line with our argument that labour market slack is already close to the Fed's finish line, despite the slowdown in employment growth in September. We do stick to our forecast of a rate hike in the December meeting.
With China slashing its key rates and the European Central Bank (ECB) hinting at more liquidity, do you think that the global equity markets should fear a possible rate hike by the US Fed?
We saw a very decent US GDP report for Q3, at least given the circumstances. A GDP growth rate of 1.5 per cent is not that bad. The feared impact from abroad didn't amount to very much: net exports hardly subtracted anything from GDP growth, while business investment still managed to grow by 2.1 per cent. More importantly, domestic demand remained strong with a 3.2 per cent rise in consumption and a 6.1 per cent increase in residential investment. The US Fed will hike if it thinks the US economy is strong enough to deal with it. In a sense, that should be good news.
Do you think the US Fed should have raised the rates in the September review, which in turn would have taken out the element of uncertainty from the global financial markets? Or was September too soon for the lift-off?
The FOMC minutes of the September meeting confirmed that the committee was concerned about the downside risks of the economic growth slowdown in China. A material slowdown in China and potential adverse spill-overs to other economies were likely to depress US net exports to some extent. However, many participants saw the effects on the US economic activity and inflation as small or transitory.
Nevertheless, the FOMC decided that it was prudent to wait for additional information confirming that the economic outlook had not deteriorated and bolstering members' confidence that inflation would gradually move up toward two per cent over the medium-term.
I think in September they were not sure what the impact of the Chinese slowdown on the US economy would be. Now, they know that it is limited. They were right in taking more time to make a proper assessment of the situation.
What is the likely reaction by the global financial markets once the US Fed does raise rates? Do you see asset allocation by foreign institutional investors tilting hugely in favour of the developed markets (US) compared to the emerging markets?
In the short run, I believe that the markets are likely to shift to a risk-off mode.
How long do you expect the upbeat scenario to last across global equity markets? Do you think that the global growth concerns as reflected in the global financial market's performance overdone or is the worst yet to come?
I think emerging economies will have a hard time dealing with both the Chinese growth slowdown and the US Fed's hiking cycle; global growth concerns are likely to remain a drag on equity markets.
What are your key takeaways from the recent meeting of the US Federal Reserve (US Fed)? Do you still stick to your earlier stance of a rate hike in the December review? Why?
As widely expected, the Federal Open Market Committee (FOMC) did not hike rates in the recent review meeting. However, they did leave the door open to a December rate hike. We might say 'wide open'. The repetition that the committee would like to see 'some further improvement' in the labour market and it would like to be 'reasonably confident' that inflation will move back to its two per cent objective over the medium-term was not surprising. This has left the door open to a December hike.
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While the FOMC continues to monitor global economic and financial developments, it seems that the committee is not very impressed by the negative impact on the US economy from the global turmoil so far. The FOMC did acknowledge the disappointing employment report for September by saying that the pace of job gains slowed and that the unemployment rate held steady.
They repeated that labour market indicators show that underutilisation of labour resources has diminished since early this year. This is in line with our argument that labour market slack is already close to the Fed's finish line, despite the slowdown in employment growth in September. We do stick to our forecast of a rate hike in the December meeting.
With China slashing its key rates and the European Central Bank (ECB) hinting at more liquidity, do you think that the global equity markets should fear a possible rate hike by the US Fed?
We saw a very decent US GDP report for Q3, at least given the circumstances. A GDP growth rate of 1.5 per cent is not that bad. The feared impact from abroad didn't amount to very much: net exports hardly subtracted anything from GDP growth, while business investment still managed to grow by 2.1 per cent. More importantly, domestic demand remained strong with a 3.2 per cent rise in consumption and a 6.1 per cent increase in residential investment. The US Fed will hike if it thinks the US economy is strong enough to deal with it. In a sense, that should be good news.
Do you think the US Fed should have raised the rates in the September review, which in turn would have taken out the element of uncertainty from the global financial markets? Or was September too soon for the lift-off?
The FOMC minutes of the September meeting confirmed that the committee was concerned about the downside risks of the economic growth slowdown in China. A material slowdown in China and potential adverse spill-overs to other economies were likely to depress US net exports to some extent. However, many participants saw the effects on the US economic activity and inflation as small or transitory.
Nevertheless, the FOMC decided that it was prudent to wait for additional information confirming that the economic outlook had not deteriorated and bolstering members' confidence that inflation would gradually move up toward two per cent over the medium-term.
I think in September they were not sure what the impact of the Chinese slowdown on the US economy would be. Now, they know that it is limited. They were right in taking more time to make a proper assessment of the situation.
What is the likely reaction by the global financial markets once the US Fed does raise rates? Do you see asset allocation by foreign institutional investors tilting hugely in favour of the developed markets (US) compared to the emerging markets?
In the short run, I believe that the markets are likely to shift to a risk-off mode.
How long do you expect the upbeat scenario to last across global equity markets? Do you think that the global growth concerns as reflected in the global financial market's performance overdone or is the worst yet to come?
I think emerging economies will have a hard time dealing with both the Chinese growth slowdown and the US Fed's hiking cycle; global growth concerns are likely to remain a drag on equity markets.