Wealthy Nations Daily Update - Fed Speak and Global growth

After a tumultuous three months across asset markets, we head into the final quarter of 2015 where market focus will remain on: the fragile global economy, the repercussions of more recent micro blowouts (read VW and Glencore) and the Fed’s rate decision.

Throughout the week there has been a lot of Fed-speak; with little change in Fed Fund guidance since the last FOMC minutes. There still appears to be a slight split in the Fed camp over this long-anticipated decision. Chicago Fed President, Charles Evans said in a speech on Monday that the US inflation and dollar headwinds may not subside until the middle of next year and has therefore called for the initial rate hike to be delayed; thus allowing the Fed to navigate through these headwinds. Other Fed members have been quick to state that short term interest rates will likely be raised before the end of the year. The market however appears to be ignoring this more hawkish Fed sentiment; Fed fund futures are pricing in the likelihood of a rate rise in December at 42.9% (up from 41.2% yesterday), with a probability of a move in October at only 16%, and 63.8% in March 2016. One of the main concerns is inflation, Fed Chair Janet Yellen voiced that the data dependent FOMC would like to see further evidence of the labour market improving and inflation moving closer to the 2% target; the latest PCE price index reading (the Fed’s prefered measure of inflation) was well below, at only 0.3% year-on-year in August. Whatever it may be, Fed members’ verbal guidance remains cautious so as to not cause any uncertainty in already knee-jerky markets.

Softness in the global economy, dragged lower by emerging market weakness, is not just getting in the the way of the Fed’s rate decision, but it’s troubling the International Monetary Fund. Yesterday, IMF Head Christine Lagarde, said that the organisation will once again downgrade global projections - which are due to be released next week; “global growth will likely be weaker this year than last, with only a modest acceleration expected in 2016.” She went on to discuss the implications of the “major economic transitions”, that is, China’s transition to the new growth model and the impending US rate hike, which are creating “spillovers and spillback.” She did however acknowledge that these shifts are “necessary and healthy… They are good for China, good for the United States, and good for the world.” The World Trade Organisation have also turned a bit more pessimistic, slashing their growth forecasts to 2.8% from 3.3% previously adding that a US rate hike, and further slippage in China could also hamper global growth further.

Markets saw an unexpected bounce yesterday, could this be a sign that the next three months may not see the spikes in volatility suffered in the previous quarter? Our view is that the present macro factors will continue to plague world growth, and that micro stories will start to trickle through; throwing another spanner in the works. While advanced economies are helping to support world growth, a number have been propped up by huge amounts of printed money, in fact the market expects that more ECB stimulus is on the way. With the whole mix of unknowns and fickle market-maker mentality we expect volatility to continue into the rest of the year, although maybe not to heady heights witnessed back in August. Either way we are very comfortable with the credit quality and diversification within the portfolio, plus volatility creates opportunity.