The third rate hike in the country isn’t a surprise for anyone as this was well telegraphed by the Fed.
European markets and U.S. futures are trading higher ignoring the fact what Trump said yesterday at the United Nations General Assembly. His speech pushed the markets lower yesterday but traders have chosen to ignore the geopolitical tension for now. Perhaps, the equity market is more optimistic about the oil price hitting the 4-year high and there seems to be no end in sight given that Trump is increasing the pressure to put a stop on Iranian oil export. Speaking at the United Nations headquarters yesterday, he said “OPEC and OPEC nations are as usual ripping off the rest of the world, and I don’t like it.”
It is clearly in the U.S. interest if the oil price stays where it is because it gives a much stronger incentive to U.S. shale oil producers to pump more oil. But, if you look at the inflation equation in the country, then yes, higher oil prices do not paint a rosy picture. The trade-off is a lower oil price equal to a downward spiral for the U.S. shale oil industry. This brings the inflation in check. The alternative is higher oil prices will boost the U.S. shale growth and it anchors the inflation in the country.
Trump also hit his stride during the speech and made his stance clear about the ongoing trade war. He was acute with his approach that the US “would no longer tolerate abuse”. This reiteration of Trump shows that the president isn’t scared of escalating the trade war. This is despite the fact that China has shown no mercy towards the US. Beijing’s message is simple: we will not tolerate this kind of behaviour. Traders are obviously having enough of this childish behaviour but the matter of the fact is that this is not something which will let the light-hearted people survive in the market. Hence, the portfolios should have immaculate risk allocation.
He continued to aim his criticism of the Iranian government and this is likely to encourage more rebellion behaviour in Iran. This equates to higher geopolitical uncertainty. The currency devaluation in Iran is certainly causing some tension but the Iranian government is well prepared this time.
Moving away from Trump and his stance, one thing I can be as sure as higher taxes in the general society is: another rate hike from the Federal Reserve over in the U.S. The third rate hike in the country isn’t a surprise for anyone as this was well telegraphed by the Fed. Moreover, given the strength of the U.S. consumer confidence data yesterday, it is almost certain that the glide path isn’t going to change anytime soon. The data showed that the economy is outranking any scale because with weekly jobless claims at their lowest levels going back all the way to November 1969, and consumer confidence sitting at 18-year high, the glass ceiling isn’t too far.
Hence, investors would be looking at the optimism among the Fed members and this is why the dot plot would be highly useful. We need to know what is the posture of the new vice chair Richard Clarida. He is known for being somewhat balance but on the same page and he holds no grudge about eight interest rate hikes (including today’s) since December 2015. Remember new projections for future inflation and GDP forecast will also hit the headlines.
What would be even more fascinating will be the statement of the Fed Chairman, Jay Powell. Keep an eye on the press conference and if he is aggressive in his tone and the outlook for the rate hike becomes stronger, then we could see the dollar index ripping towards the upside. The index is down nearly 2.94 percent from its peak of $96.98 formed on the 15th September. A higher dollar is also likely to push the 10-year yield towards its peak which was witnessed earlier this year. Under those circumstances, what we will have on our hand is; emerging market crisis, trade war and geopolitical tensions. Therefore, I believe that the Fed would be more cautious in their approach and the press conference would be more controlled rather than full of fireworks.
