Interest Rate Outlook
Last week the market was spooked by the strong GDP growth of 4% in US in the 2nd quarter when most analysts were expecting it to be in the region of 3%. Stock markets were sold down on fears of sooner than later rate hikes in the subsequent days. Here’s a summary of all that you need to know :
- Consumer and business spending led broad-based gains in 2nd quarter GDP with the former (which is 70% of US economy) advancing at 2.5% double the pace in Q1.
- In terms of job growth US employers have been adding more than 200,000 jobs for five straight months and the latest figures in June should see that trend continued.
- Job growth has also been accompanied by wage increases with inflation-adjusted disposable income up 2.4% on year which is the best annual gain since late 2012.
- Indeed unemployment in June is now down to 6.1%. For months Fed has been saying the jobless rate remains elevated but it dropped that reference this time.
- Officials also noted inflation which has been running below 2% for years is now closer to the target (2%) and risk of deflation is diminishing.
- Following 2 days of FOMC’s meeting, tapering continued with reduction in bond purchases down from US$35b to US$25b per month, on track to end after October.
- Not surprising US bond yields jump by the biggest amount since Nov 2013 with the US 10-year Treasury note ending the week at 2.556%
- Fed Res chairman Janet Yellen’s sums up the latest assessment of the US economy with “Labor market conditions improved, with unemployment rate declining further.”
- The US economy appears to be on track to register continued gains in the 2ndhalf of 2014 as the growth momentum carries through.
Debate is now on the timing of the 1st interest rate hike which is now generally expected to happen in Q2 2015 instead of the earlier mid-2015, albeit Yellen has again repeated in Fed policy statement that they will wait a “considerable time” after bond purchases end before raising rates.
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