Economists and analysts have been spilt on how global asset markets will absorb a rate hike after brief sell-offs in the a year ago on positive data or on hawkish comments by a member of the Federal Reserve.
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“The economic risk of them raising too soon still outweighs the risk of them lifting off late”.
Most Asian markets were trading lower on 10 November (Tuesday) amidst fears of a rate increase by the US Federal Reserve at its December policy meeting.
A rate rise would traditionally lift the dollar. Investors now seem extremely confident in the Fed rate hike slated next month.
On Friday the US Department of Labor announced that the USA labor market added an astounding 271,000 jobs in October, according to the Bureau of Labor Statistics.
The US nonfarm payrolls data showed a surge in jobs in October and the unemployment rate hit a 7-1/2-year low of 5.0 percent.
South Korea’s KOSPI dropped 0.6 per cent and Indonesian shares lost 1.6 per cent. The gainers included Tokyo’s Nikkei which rose 2 per cent thanks to a sharply weaker yen against the dollar.
“What the committee has been expecting is that the economy will continue to grow at a pace that is sufficient to generate further improvements in the labor market and to return inflation to our 2% target over the medium term, and if the incoming information supports that expectation then our statement indicates that December would be a live possibility”.
The Fed has not yet decided, and what path it will take will depend on the economic data that comes out before its December 15-16 meeting, Obstfeld acknowledged. United States dollar strength might lead to financial instability in the emerging market; this is similar to 1992-2001 when we saw a USD bull market cycle. Everyone knows the Fed wants to raise rates and everyone is prepared for it, so like the proverbial band-aid, just do it and rip it off quickly before another negative economic report gives the Fed more reason to dawdle. At the end of the first quarter of 2016, it is expected to be another quarter-point higher.
Both forecasts are unchanged from an October poll.
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Shanghai’s stock market ended up 1.6 per cent. But Hong Kong closed 0.6 per cent lower while Sydney, where several firms with links to China are listed, ended down 1.8 lower on the trade figures. “This data tips the scales toward a rate hike in December, but more importantly is a sign that our economy may have more punch than we thought”. “As a result, authorities lack the ample fiscal and monetary policy buffers usually created at the top of the business cycle, leaving growth and global financial stability particularly vulnerable to shocks for an extended period of time”. It also warned that downside risks could sink global growth to as low as 1.9 percent.
