federal reserve of United States

Rate Hike 2015 Or 2016?

It’s sounding much like a broken record that has been playing for far too long now …

From what we have read, there are clearly 2 camps out there as all eyes center once again on US Federal Reserve in their final FOMC meeting scheduled for December – the dominant camp suggests that with financial market turmoil triggered by devaluation of the yuan in August and Chinese economy’s slowdown affecting global trade and impacting US economical recovery in due time, Fed’s hands are tied and any suggestion of rate hike will be in 2016.

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Then there is the other camp which includes our very own Deputy Prime Minister of Singapore Tharman Shanmugaratnam who made his case last week during the Latin Asia Business Forum held in Singapore that “the uncertainty brought about in anticipating when the hike will come is a cost too much for the world to bear”. The uncertainty has let to market volatility and affected exchange rates of major currencies and capital flows. Indeed there is an increasing voice that echoes similar sentiments of “let’s just get it over and done with”.

No one knows for sure which way the pendulum will swing when the Fed meets up again in about slightly more than a month’s time however we made the following observations :

  • The Chinese handling of stock market rout back in August/September has left much to be desired yet somehow the draconian measures unlike what we are familiar with in a free market seemed to have worked in stabilizing the free fall. Global markets have survived another correction.
  • With the jittery month of October almost coming to an end and the tendency for markets to drift higher on year-end festive moods and corporate window dressing, the market might surprise on the upside.
  • We commented earlier there are deep repercussions to significant events like yuan devaluation not unlike the oil price crash last year. Indeed this might be just what the Chinese economy needed to pull itself out of the slowdown in GDP growth. The picture will be clearer in about another 3 to 6 month’s time for its effect to filter through global trade.
  • Inflation is still weak in US which is the chief reason why Fed is in no hurry for rate hike. Inflation looks likely to remain weak with USD gaining strength against all major currencies and with oil prices unlikely to recover further in near term. The only reason for Fed to hike rates seem to be what the 2nd camp is hinting at – to get it over and done with. After the liftoff the markets will expect Fed to restrain itself from further hikes until they see solid evidence of labor market gains and inflation rearing its ugly head. That might only arrive end of 2016.

As Singapore’s Sibor (Singapore Interbank Offer Rate) tracks closely the rise in rates in US, we do expect the market to start factoring in this lift off (we still think it could be in December) over the next few months and for 3-month Sibor to rise up again from the current levels to hit 1.20 before the year is over.

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Lowest Fixed 3.15% (Min $500k)