As we correctly anticipated the US Federal Reserve (Fed) increased interest rates by 0.25% this morning
with a unanimous decision by Fed members. We have now seen an end of an era with the first US rate hike
since 2006, and the end of the US’s zero interest rate policy which was required in the global financial crisis.
Importantly the Fed has stated it sees conditions warranting only “gradual” rate increases in order not to
shock markets, and a hike also signals that the Fed believes the economy is now strong enough to support
future economic growth without needing emergency interest rates to support it. Global Equity markets
continue to rally following the Fed decision, and in today’s daily we discuss the positives of a Fed hike, and
Crown Resorts (CWN) a holding in our Australian portfolio which was up 10.5% yesterday.
At The Minute insights
Crown Resorts – Packer Goes All In
Pros of a Fed Hike
There are a few major arguments for why a rate hike is a good thing:
1) The US economy is strong enough to withstand higher interest rates in the Fed’s eyes. In particular
the Fed focusses on unemployment which is at a 7 year low.
2) Psychology, if the Fed backed-off from its widely anticipated hike it would indicate they had a
serious lack of confidence in the strength of the US economy.
3) Reputation, linked to psychology, given the many months of preparing the public for a rate hike
the Fed would lose credibility.
Equity Markets
Share markets have reacted positively to the rate hike decision this morning, and sits with our view that
stock markets are comfortable with interest rates gradually increasing in the US. There appears to be
significantly less nervousness and volatility in markets when compared to this year’s pervious rates
decisions. mentioned above we believe a hike is a reflection that the US economy is now strong
enough and no longer requires emergency support of zero interest rates. Previously, there was concern
that an interest rate hike could spark a collapse in equity markets, but this no longer appears to be the
consensus view. Although execution will be key as a path to higher rates will still need to be gradual (in
order not to shock markets as higher rates hurt economic growth), and we believe a key driver of markets for 2016 will be the speed at which the Fed increases interest rates.
Chart of the Moment
Five Things Markets Will be Watching this Week
1) The highly anticipated 2 day US Federal Reserve Meeting will conclude on Wednesday, we expect
the Fed raise interest rates for the first time in 8 years (Thursday morning Australia/NZ time).
2) In NZ, quarterly GDP figures are due to be released on Thursday which will provide insights into
the health of the NZ economy. The consensus is for annualised GDP growth of 2.30%.
3) Important European inflation and manufacturing data will be released on Wednesday and should
help provide the European Central bank with more direction as to its easing policies.
4) The Oil price – whether the free-fall in the oil price will halt or reverse will be important for both
energy stocks and market sentiment more generally
5) More generally whether markets globally can reverse last week’s declines.