There are certain market segments that are more sensitive to changes in monetary policy and may benefit if the Fed delays liftoff further. Russ explains.
Late last month, the Federal Reserve (the Fed) reminded everyone that a 2015 rate hike is still a possibility. That said, with the economy decelerating, emerging markets still a risk and inflation expectations stuck near multi-year lows, a December hike is by no means assured.
Should the Fed demure and recent seasonal patterns persist, i.e. first-quarter economic weakness, it’s entirely possible that an initial hike gets pushed out until the second quarter of next year.
Market Realist – Is the December hike a certainty? Not so much.
The US GDP rose 1.5%, annualized in 3Q15 after expanding 3.9% in 2Q15. The slowdown was a result of businesses cutting down on inventories and tepid exports growth. However, consumer demand was robust, growing by a solid 3.2%.
While the first estimate for 3Q15 GDP growth was uninspiring, the October jobs report was anything but. In October, 271,000 non-farm jobs were created—the most jobs created since December 2014. Also, there were signs of wage growth picking up, which some people feel could be enough to bring about the rate hike in December. Following last Friday’s jobs numbers, the implied probability of a rate hike in December rose to 70%. The yield on the ten-year Treasury (IEF)(PST) has risen to 2.4% as of November 9, from 2.0% as of October 28, showing that the market has factored in the possibility of a rate hike in December.
However, some emerging markets (EEM) are still reeling from the slowdown in China (MCHI). The Russian (RSX) economy slipped by 4.1% in 3Q15, on a year-over-year basis, and it’s not expected to come out of its recession in the next few quarters. Slowing growth in emerging markets could be a factor come the December FOMC (Federal Open Market Committee) meeting, as the Fed pointed to “growing uncertainties abroad” as a reason for holding rates steady in September.