Last week the International Monetary Fund (IMF) warned that the sustained and escalating global trade conflicts initiated by the Trump Administration threaten to derail the economic recovery and depress medium-term growth prospects. The IMF believes that the global economy as a whole could lose about 0.5% of growth or about USD 430bn in lost GDP by 2020, with the possibility of the US being hit especially hard.
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”.
As central banks continue to face headwinds from increasing global growth and deflationary concerns, there has been talk of the US either lowering rates even further (to negative rates) or in fact unleashing QE4. However, neither option has been mentioned by Fed members, the majority of whom have insisted that we will see a rate rise this year. With only two more meetings to go, and after the disappointing US nonfarm payroll release for September last week, a number of market makers have revised their expectations for rate “lift-off” out to 2016. The minutes from the FOMC’s meeting in September will be released later today; we expect very little in the way of change to rhetoric.
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.