Interest Rate Hike Next Week? – mark your calendars! On Wednesday, December 16, the Federal Reserve will meet and almost certainly raise interest rates for the first time since June 2006. It’s about time. In our view, and as Mitch has written several times over, the U.S. economy has been strong enough to sustain an interest rate hike (or even a few hikes) for well over a year. It’s a near certainty that will happen next week.
To be clear, it’s not that we want higher interest rates and the potential to choke off growth – the issue is that if the Fed waits too long to raise rates, it will not have tools at its disposal if another crisis or recession occurs. It’s better to enter a gradual hike cycle while an economy is strong, so that when it gets weak again you can cut rates to stimulate.
How Will the Market React to a Rate Hike? – the reality is that the market has alreadyreacted to the rate hike. A good rule of thumb is that if everyone is talking about something and expecting it, the market has already priced it in. Looking back at the last month, the S&P 500 has wobbled quite a bit and is down a little less than 2%. If you look at past rate hikes and the beginning of rate hike cycles, this actually matches up. The market generally displays some negative volatility in the short-term before and after a rate hike, but then six to twelve months out is positive. That’s what we see in this case too. After all, it makes sense why the market would do well during tightening cycles – the Fed typically raises rates when the economy has underlying health and strength, which means growth is good and corporations are in a position to expand earnings.
Crude Dips into the 30’s – nothing about OPEC’s decision-making process leads me to believe they even care about low oil prices. In my view, their main objective is to put as many U.S. shale drillers out of business as they can. In a recent meeting OPEC did not agree to an official output ceiling, which tells us that the days of 30+ million barrels a day are likely to continue apace. Oil prices are now at six-year lows, and may hang around here as long as OPEC keeps adding to the glut.
Stop-Gap Measure Passes, U.S. Government Stays Funded – on Thursday, the Senate passed a stopgap measure to help avert a potential U.S. government shutdown this weekend. The House will vote on the measure Friday. In the works is a much broader $1.1 trillion budget deal, which we see a slim chance of passing. The demands coming from both sides of the aisle are as contentious as they’ve ever been. Among many other demands, Republicans want to lift a 40-year-old ban on the export of most U.S. crude oil, and many want to block Syrian refugee resettlement in the U.S. House Democrats reacted by requesting the removal of a two-decade-old ban on gun violence research by the Centers for Disease Control and Prevention. These are just two of the slew of issues coming from both sides. Settle in for a heated couple of weeks of budget talks.
Checking in on GDP Growth Around the World – “growth” being the key word here, albeit at a very modest pace. The biggest surprise this week came from Japan, which turned outnot to be in a recession like everyone had assumed. Japan’s economy actually grew quite nicely all things considered – it posted an annualized +1% growth rate compared to an early reading of a -0.8% contraction. This slight bit of growth reassurance does not change our secular stance on Japan, however. With an aging population, the highest debt to GDP ratio of any developed country, zero inflation and a central bank that’s had its foot on the pedal for years now to little avail, we can see this ending with a crisis. But, that’s still a ways off. Meanwhile, in Europe, the GDP 19-nation zone ticked up 0.3% in the three months through September, after rising 0.4% in the prior quarter. We think Europe’s recovery is moving along nicely, and the central bank is helping – it cut one of its main rates to a record low and expanded its asset-purchase program to at least 1.5 trillion euros.