The below is a market reaction to the US Federal Reserve raising rates from one of the many investment companies we use for our clients’ portfolios.
The US Federal Reserve under Janet Yellen succeeded last night in raising rates and getting a positive market response. The S&P 500, which had risen before the rate move was announced, was up a further 1% after the rate rise closing up 1.4% on the day. This was despite the recent falls in the oil price, ongoing China concerns, Argentina’s devaluation of its currency and Brazil being downgraded below investment grade.
Janet Yellen had prepared the market well. The upward revision of growth expectations and the reference to only gradual rate rises helped. Far Eastern markets have welcomed the news also rising and FTSE futures are indicating a positive opening in London (FTSE 100 December Future up ~86 as I write). 10 year US treasury yields were virtually unchanged after the announcements and there is likely to be little knock on effect on the Gilt market.
The last US rate rising cycle was between June 2004 and June 2006 when the Fed raised rates from 1% to 5.25% moving in steady 0.25% moves. During this time the S&P 500 returned 15%. At the start of the cycle consumer prices were rising at over 3% but at this time the December 2016 CPI showed a rise of only 0.5%, even core inflation ex food and energy was only 2%.
The Fed has indicated that they will be looking for signs of a inflation picking up for further rate rises. The so called dot plot of rate expectations shows their expectation for next year is for three to four more rises. I believe even this gradual rate may be steeper than what we actually get. The futures market currently prices an expectation of two rate rise next year.
I have no doubt that Mark Carney would also like to prepare the markets for a rate rise in the UK but will have to wait for some time to be able to move. The Bank of England have a 2% inflation target but with CPI well below this level and continued negative rates in Europe, it is hard to see a move here until the second half of next year at the earliest.
Overall we can maintain our positive stance on Equity markets into the year end.