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In December last year, after its first interest rate hike in a decade, the Federal Open Market Committee indicated there likely will be four interest rate hikes in 2016.
Such was the optimism over the US recovery. Then came the January crash in equities as investors digested the extent of China’s flagging growth. Talk of further rate hikes under these circumstances seemed suicidal. Now it looks as if any increase in rates will have to wait till later in the year, or even 2017.
Dovish comments by US Federal Reserve chair Janet Yellen and some of her colleagues on the outlook for US interest rates have contributed to a flow of funds to emerging-market currencies and assets in recent weeks, boosting currencies like the rand and the FTSE/JSE All Share Index.
Yellen has expressed concern over weaker-than-expected global growth and uncertainty over the outlook for US inflation, China and global oil markets, indicating that US interest rates will stay lower for longer.
Earlier this month, the International Monetary Fund (IMF) downgraded the growth outlook for all major advanced economies, including the US, Canada, Japan and the eurozone. The US is now expected to grow by 2.4% this year, lower than the 2.6% forecast by the IMF in January. The US grew 2.1% in 2015 and 2.4% in 2014.
The outlook for global growth was cut to 3.2%, from a January forecast of 3.4%. On the plus side, the outlook for China, the world’s second-largest economy, was increased by 0.2 percentage points to 6.5%.
Despite the IMF’s cut in the US growth outlook, judging on the economic statistics from a range of government bureaus, the US economy looks perky. The unemployment rate now stands at about 5%, the standard benchmark for full employment.
The US Bureau of Labor Statistics reported that there were 215 000 new jobs in March, continuing a trend that began in 2010. Including part-time and discouraged job seekers the US unemployment rate rises to 9.7%.
Markets rebound
The recent surge in US stock prices – despite expectations of lower first-quarter profit figures – has been a tonic for world markets. On 18 April, the S&P 500 closed at its highest level since the start of December, and only 2% below its record high of May 2015, according to ft.com data.
In January the Dow Jones Industrial Average plunged more than 10% in 10 days, and then promptly recovered all these losses. The FTSE 100 fell 10% in January but has since recovered 14%, breaking new highs for the year. Japanese stocks lost more than 20% of their value in January, recovering 13% since then. The Shanghai Composite Index was butchered 27% over the same period, rebounding 16% by 15 April.
These were frightening days for investors. Oil bottomed at about $26/barrel in January before surging to $44 on 12 April. The rebound in asset and commodity prices in the first three months of the year has been fed by a steady diet of positive economic news. The supposed meltdown in China has not materialised, as demonstrated by news that the economy grew 6.7% in the first quarter of 2016.
The Long-Term US Treasury Bond exchange-traded fund (ETF) is up 9% since the start of the year, while ETFs comprising corporate bonds have gained roughly 7%, not counting the yield of 4.4%, courtesy of signals from the Fed that the days of easy money and low interest rates will continue. Returns from corporate bonds are primed to beat equities in 2016, as they have done in 14 of the last 19 years, according to Eddy Elfenbein, editor of the blog Crossing Wall Street.
In January Morgan Stanley put out a report that the US economy could continue growing until 2020, which would make this the longest US expansion since World War II. It based this analysis on job growth of about 200 000 a month in 2015, a trend that has continued into 2016, which in turn has fattened the wallets of consumers.
The University of Michigan’s Consumer Sentiment Index averaged 92.9 last year, the highest since 2004. Though the index has dipped in each of the last four months, the University of Michigan expects inflation-adjusted personal consumption expenditures will grow by 2.5% in 2016.
This is an except from an article that originally appeared in the 28 April 2016 edition of finweek. Buy and download the magazine here.
