With a Federal Funds Target Rate hike expected later today, futures markets have already priced in a 25bp rise following recent strong data, hawkish official comments and waning of external risks. Indeed with USD10bn already shorting Blackrock bond ETFs, announcement swings (if any) could go either way. Focus instead will be on the trajectory of future hikes and any words on future balance sheet reductions. Given that 3-4 hikes were expected in 2016 (and considered gradual back then) a rate rise today supports a similar expectation for the Fed for this year. Three rate rises this year still look more likely than four and we expect any balance sheet reductions will come with the next hike; downplaying their significance.
It seems China will have to wait another year and push further reforms in order to satisfy the requirements of MSCI that would allow its A-Shares to be classified as Emerging Market. Such a reclassification has been impending for years and yesterday MSCI again postponed the inevitable – awaiting increased capital market accessibility and transparency. It had seemed more likely now than in previous years considering the accelerated reforms of the past 12 months (which mollified the IMF sufficiently to include the Chinese renminbi into the SDR in November 2015).
Antoine van Agtmael, the man who coined the term “Emerging Markets” is, along with journalist Fred Bakker, releasing a new book called “The Smartest Place on Earth”. In it they challenge the prevailing views of emerging growth spots – views of course which Mr Agtmael helped to pioneer in the first place but which are now 35 years old. The thrust of their new thesis seems to be that untold future growth potential lies, no longer primarily in less developed and distant shores but, in regions which can combine their underutilised brainpower and infrastructure to capitalise upon new opportunities of innovation. Areas like the US “Rust Belt” stand to benefit in a period where, “the global competitive advantage is shifting from cheap to smart”.
Having effectively backed itself into a corner to pull the trigger in December, the Fed unsurprisingly left rates unchanged yesterday. Aside from a stronger job market, US economic activity remains mixed (for example, durable goods orders fell -5.1% in December versus market calls for -0.7%) and as we are all aware, inflation is tracking below their 2% target. Sounding relatively upbeat about the state of the domestic economy, the data dependant Fed added that any policy decisions will now also be tied to markets; stating it will be “closely monitoring” global economic and financial development.