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Cape Town - A June interest rate hike by the US Federal Reserve still looks to be very much in play, Investec economist Chris Hare said on Thursday.
"Our central view of the US rate outlook hasn’t changed," said Hare. "However - as has been the case for several months - markets are more dovish than the expectation of Investec and consensus economists."
Market pricing implied only a 20% chance of a June hike and does not imply a rate rise until November.
"So, if we are right, then you might see some upward correction in interest rate expectations. That correction might only come gradually," said Hare.
An implication of that might be more strength in the dollar, which would be good for investors repatriating income to SA.
But a “hawkish” correction might make bonds more attractive, relative to equities, he pointed out.
On Wednesday the Federal Open Market Committee (FOMC) announced that it will not be raising rates at the moment. This was mainly due to slowdowns in business investment and exports weighed up against job growth and housing market improvements.
Based on the tone of the FOMC comments, Hare believes a June rate hike by the Fed is by no means a certainty, though.
"My take would be that the Fed has left the door wide open with regard to rate hikes in June. First and foremost, I should note that there was no explicit nod in the statement to the June meeting," said Hare.
One "hawkish" point - which in his view makes a June hike look more likely - is that the FOMC statement removed a reference to global economic and financial developments continuing to pose risks. It was also noted that labour market conditions had improved further.
"However, if anything, the statement softened its tone on recent rises in inflation, and spoke of a softening in overall activity," explained Hare. "Taking that together, we maintain our call for a June hike."
At the same time he does not think the probability of it happening is really any more or less likely than he would have thought before the latest announcement. He added that the market reaction to the announcement was slightly dovish, pointing to a slightly lower likelihood of a June hike.
In Hare's view, Wednesday's FOMC statement really underscored the notion that it is acting extremely cautiously.
"The Fed wants to move very gradually on policy, while not wanting to spook markets, or the economy more generally, along the way," said Hare.
"So even if we see that correction, interest rate prospects are still for very gradual and limited rises. So that should see investors continuing to pile into US equities in search of a return."
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