Though the Federal Open Market Committee (FOMC) announced at end-July the determination of remaining the benchmark interest rate unchanged, it can be seen from the two declarations made by US Federal Reserve (Fed) Chairwoman Janet Yellen in July and the performance of the employment and inflation in the U.S. that the interest rate increase by Fed still sees growing market expectation.
“About the critical wording on the time of increasing interest rate, “patience” is removed in the meeting in March, while the meetings in April, June and this month all suggest no indicative changes. Considering the “internal prediction” disclosed earlier, it is highly possible that the Fed might raise interest rate for once within the year. As to the time of implementation, the Fed seems to still waiting. The probability of increasing interest rate in Sept. decreases a little and might be postponed”, Guan Qingyou, executive director of Minsheng Securities Institute, during an interview by Securities Daily.
Latest data suggests that the unemployment rate in the U.S. showed a declining trend after quarterly rebalance since this year. The data in June and July all maintained at 5.3 percent, declining by 0.4 percentage point compared with 5.7 percent in Jan. At the same time, the inflation in the U.S. is picking up. The U.S. personal consumption expenditures (PCE) price index in June saw an annualized growth rate of 0.3 percent in June, while the previous data and expected growth are 0.20 percent; the U.S. core PCE price index saw an annualized growth rate of 1.3 percent in June, while the previous data and expected growth are 1.2 percent. However, the figure is still lower than the 2 percent targeted by the Fed.
A recent report shows that the U.S. labor cost index in the second quarter recorded the lowest increase in over 30 years, indicating strong employment growth, but since salary sees no big improvement, inflation is restrained from going up.
However, Jiang Chao, a chief analyst on macro bond from Haitong Securities Company Limited (06837.HK; 600837.SH), believes that as the U.S economy is near the full employment level, growth regression is rapidly developing and inflation is moderately recovering, the Fed is expected to be on the way of raising interest rates this year and is likely to initiate its first interest rates hike in Sept.
In the opinions of many market participants, the interest rates hike by the Fed this year is an event with big probability. Although it has not been realized at present, the market expectation has exerted significant influence on the international commodity markets. US benchmark West Texas Intermediate for delivery in September slid by 2.04 percent to 43.75 U.S. dollars per barrel on Aug. 7, hitting a new low since this year. The COMEX gold futures for delivery in Dec. is recorded at 1,090 U.S. dollars per ounce since the flash crash on July 23. Meanwhile, the U.S. dollar index is staying around 98 points.
As for the influence of the U.S. interest rate hike on China’s economy, Guan Qingyou indicates that there might be both positive and negative effects: demand expansion driven by the U.S. economic recovery would boost China’s export; RMB real effective exchange rate following the U.S. dollar appreciation would cut China’s export.
But the latter’s influence may be greater and tends to be negative on the whole. Due to the slow pace in increasing interest rates and the adjusted expectation, the marginal impact of capital outflow is limited in the short term. Nevertheless, the narrowed interest margin in China and foreign countries and the major cycle of the U.S. dollar appreciation will cause capital reflow to the developed markets in the long run. During this period, China’s central bank will be trapped in a dilemma whether to keep the economic growth or keep interest rate. Interest rates and asset prices in emerging markets will bear pressure accordingly.
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