Scott Jamieson, Head of Multi-Asset Investing at Kames Capital, analyses whether the US Federal Reserve will raise rates in September, or whether the looming election means rates are on hold until 2017.
“The latest guesstimate of real-time US economic growth (prepared by the Atlanta Fed) suggests that activity is rising at a very healthy 3.5% annualised clip. It is encouraging that this incorporates the disappointing reading on US manufacturing sentiment that came out last week – the ISM measure for August fell below the neutral reading suggesting modest slowdown.
“As we look forward to the next FOMC meeting (Sep 21st) the general backdrop across the globe has the economic data coming in a little softer than the forecasts. Perhaps importantly China is one of the few exceptions with their version of the ISM continuing to creep higher and suggesting expansion – an apparently better Chinese economy should at least keep emerging markets calm and better placed to absorb a tightening in the US policy rate if it comes. Beneath the surface trends in Chinese trade data do not encourage confidence about broader economic trends. Import and export values have been falling for over a year and are still falling.
“On balance Yellen should have the platform for lifting the US policy rate; the question is, does she feel that she can get away with it? With the election looming she will not want to be blamed for upsetting financial markets. Equally if the politics negatively feedback into markets then almost certainly she would like some more altitude to rates – just in case. If interest rates were already around 3% this would be a non-event but they are not.
“The UK has seen the strongest ‘beat’ on forecasts in recent weeks. In particular last week saw industrial PMIs come in much stronger than expected. Although the change is more impressive than the absolute levels – in general the readings are consistent with only modest expansion, this is a decent achievement nonetheless given the bleak expectations of a few weeks before. With UK forecasts now perhaps normalised (after the Brexit spasm) it will be interesting to watch how things evolve. Longer term concerns – as Theresa May highlighted this morning, should ensure that Hammond has the platform he needs to support the policy cocktail announced recently by the BoE.”