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3 Reasons Why Rate Hike Unlikely to Happen This Year
Aspire | 09 October 2015
By: Raymond Leung
Articles (142) Profile

As the jitters from the holding of the interest rates by the Federal Reserve (Fed) persist in the market, more bad news began streaming coming in. Poorer employment figures were reported as job creation in US missed expectations. To worsen the woes, the German factory orders had unexpectedly fallen. These led to several market watchers’ speculation that the rate hike will not even happen this year.

1.   Poor Job Data

Source: Jobs Creation in Thousands, US Department of Labour

Jobs creation for the month of September missed its target, adding only 142,000 jobs while economists had been expecting 203,000 new jobs. Unemployment was held at 5.1 percent according to statistics provided by the US Labour Department.

UBS’ Art Cashin said that the US economy is slowing down and the weak jobs report confirms it. Cashin feels that it if the weak employment data persist, it will be undebatable that the Fed will not increase interest rates. One of Wall Street’s most prolific bears, David Rosenberg, also expressed worry over the bad September employment reports.

2.   Weak Manufacturing & Commodities

Source: German Factory Orders, Investing.com

Following the slowdown in emerging markets led by China, Germany is the latest country to take a hit. German factory orders unexpectedly contracted by 1.8 percent in August, which was well below the consensus estimate of 0.5 percent growth. With manufacturing data weaker globally, commodities prices will continue to remain soft as consumption remains low.

This will put extra pressure on the Fed to put a hold on rising interest as woes from China continue to spread globally. Stefan Kipar of Bayerische Landesbank commented that although it is too early to fall into panic from the August order data, it is clear that China’s high uncertainty and cooling economy has left its mark.

3. Market Volatility in Emerging Markets

Source: YTD of Shanghai & Shenzhen Composite Index, Google Finance

Janet Yallen named market volatility from emerging markets especially China as a key consideration when holding the interest rate at current level in September. YTD (year-to-date) performance of China’s key indexes, the Shanghai Composite and Shenzhen Composite, are in the red. Liquidity from investors is flowing out of emerging nations at an all-time high.

Furthermore, the increasing slowdown in emerging nations has prompted the World Bank to cut its growth forecast for parts of East Asia and the Pacific. The forecast now stands at 6.5 percent, down by 0.2 basis points from April’s 6.7 percent. However, Sudhir Shetty of World Bank believes that China will be able to meet its growth target of 7 percent and expects the Chinese slowdown to continue to 2017.

Investors’ Takeaway
It is still too early to conclude that the Fed will completely hold off the rise of interest rates this year. However, we are sure that the probability of an October hike is low based on the recently released weak economic data. According to CME Group’s FedWatch, the odds of an October Hike now stands at a mere 5 percent while a December rise is at 27 percent. The three factors highlighted above will be the key indicators if the Fed will raise its rates. Investors will need to keep a close lookout for the various economic data.

Trained in fund management, Raymond is familiar with shares and various investment vehicles.

Please click here for more information about this author.


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