ASX gets jitters from Fed’s probable interest rate hike



At the recent annual gathering of global central bankers in Jackson Hole, Fed Chair Janet Yellen said the probability of an interest rate hike in the US have been reinforced in recent months as data related to the overall economy and the labour market in particular have been more or less steady. Yellen did not give hints on the timing of the hike, but Fed Vice Chairman Stanley Fischer said her speech was in line with the Fed policy of a rate hike in the near future. While some analysts expect any rate increase to take place in December, markets have swiftly priced in the possibility of a September hike. With the Fed meeting on Sept. 20- 21, global markets including the ASX are likely to be affected in the near term. On the other hand, the softness in the latest US payroll data otherwise indicated for a different view from some economists. Nonetheless, the commentaries from most of the Fed members have lifted the rate rise expectation probability from a 52% chance to a 60% chance.

Following the announcement, US Treasury yields rose to their highest level since June but the US dollar dipped slightly. In the interim, the dollar index, which measures the performance of the greenback versus a basket of currencies, was also trending unchanged, placed near the 95.15 mark. Prices of commodities were also targeted. The S&P-ASX 200 slipped about 2.24% to settle at its fourth-worst session for the year on September 12, 2016. This also came at the back of the sell-down spread.

The probable interest rate increase by the Fed might thus stir the Australian stock markets, although the immediate outcome of a rate increase is difficult to predict. Over the past few years, the Australian economy and the stock markets have been trending differently compared to the US markets. The ASX is yet to rally beyond its pre-crisis peak while interest rates in the country are at historical lows although there are no signs of recession. In the event of a rate increase in response to an improving economy, it is observed that cyclical sectors that comprise financials, IT, energy and industrials perform reasonably well and could be good investment opportunities.

The interest rates in Australia are at historical lows of 1.5 percent. Retail inflation in the June quarter edged up after declining the previous quarter. However, the main cause of concern relates to the labour costs, which continue to remain low, although on the positive side, low labour costs could encourage hiring, thereby pushing up employment. The RBA expects inflation to remain low in the short term, thereby signalling that rate increases are ruled out any time in the near future, a big positive for the ASX.

With talk of capital moving into the US as rate increases take centre stage and most of the developed economies struggling at near zero or negative interest rates, the current position of the Australian stock market is slightly jolted post a comparatively stable state.

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