17 Dec 2015
Fed out of the way, its BoE’s turn now – Fidelity
FXStreet (Delhi) - Stephanie Sutton, Investment Director at Fidelity International, comments on Fed’s rate rise.
Key Quotes
“This time around economic data and global conditions were supportive enough to allow the Fed to initiate its first interest rate hike in almost a decade. With the first rate hike now behind the market, the focus will turn to the pace of further rate hikes. Whilst gradual rate increases have been priced in, any acceleration in the pace might create uncertainty and volatility.
“Further, whilst the hike in itself acknowledges the good health of the US economy, it certainly increases the debt burden on both households and companies. Thankfully, there is little risk of payment shocks or greater defaults post lift-off as the bulk of household and non-financial corporate debt is in fixed rate loans. To illustrate, approximately 90% of US mortgage debt is locked into fixed rates and the modest monetary tightening will not have a major impact. Despite this, the two possible areas of concern include student debt and subprime auto loans as these loans have witnessed high delinquency rates rise in the recent past. However, increased delinquency in these two areas does not really threaten the financial stability of the economy. In addition, a strengthening economy and job growth will help debtors to service these loans.”
US equity market well placed to cope with tighter monetary policy…
Dominic Rossi, Global CIO – Equities, Fidelity International, comments: “US consumers are entering 2016 stronger than in they have been in a decade. US consumption will easily be able to weather the expected modest interest rate increases and the domestic economy may well turn out to post a surprisingly strong performance.
“The strength of the domestic economy leaves the US equity market better placed to cope with tighter monetary policy than other markets. This means that in US dollar terms, we can continue to expect the US market to outperform.”
Bank of England unlikely to act in immediate future…
Kevin O’Nolan, Portfolio Manager, Fidelity Solutions (Fidelity International’s multi asset team): “With the Fed having now commenced liftoff, the debate as to whether the Bank of England should also begin raising rates is likely to come into sharper focus. While unemployment and inflation readings are at broadly similar levels across both the UK and the US, the BoE has indicated that it would like to see evidence of consistent wage growth before raising interest rates. Wednesday’s earnings data confirms the slight softening we have seen in recent months and with the Brexit vote to come later this year the Bank is unlikely to act in the immediate future.”
Key Quotes
“This time around economic data and global conditions were supportive enough to allow the Fed to initiate its first interest rate hike in almost a decade. With the first rate hike now behind the market, the focus will turn to the pace of further rate hikes. Whilst gradual rate increases have been priced in, any acceleration in the pace might create uncertainty and volatility.
“Further, whilst the hike in itself acknowledges the good health of the US economy, it certainly increases the debt burden on both households and companies. Thankfully, there is little risk of payment shocks or greater defaults post lift-off as the bulk of household and non-financial corporate debt is in fixed rate loans. To illustrate, approximately 90% of US mortgage debt is locked into fixed rates and the modest monetary tightening will not have a major impact. Despite this, the two possible areas of concern include student debt and subprime auto loans as these loans have witnessed high delinquency rates rise in the recent past. However, increased delinquency in these two areas does not really threaten the financial stability of the economy. In addition, a strengthening economy and job growth will help debtors to service these loans.”
US equity market well placed to cope with tighter monetary policy…
Dominic Rossi, Global CIO – Equities, Fidelity International, comments: “US consumers are entering 2016 stronger than in they have been in a decade. US consumption will easily be able to weather the expected modest interest rate increases and the domestic economy may well turn out to post a surprisingly strong performance.
“The strength of the domestic economy leaves the US equity market better placed to cope with tighter monetary policy than other markets. This means that in US dollar terms, we can continue to expect the US market to outperform.”
Bank of England unlikely to act in immediate future…
Kevin O’Nolan, Portfolio Manager, Fidelity Solutions (Fidelity International’s multi asset team): “With the Fed having now commenced liftoff, the debate as to whether the Bank of England should also begin raising rates is likely to come into sharper focus. While unemployment and inflation readings are at broadly similar levels across both the UK and the US, the BoE has indicated that it would like to see evidence of consistent wage growth before raising interest rates. Wednesday’s earnings data confirms the slight softening we have seen in recent months and with the Brexit vote to come later this year the Bank is unlikely to act in the immediate future.”