Roubini Now Looking At December Rate Hike And Beyond, Makes Investment Recommendations
What matters most is not when the U.S. Federal Reserve raises interest rates, the September monthly update from Roubini Global Economics says. What matters is the speed and duration of hikes. That said, Nouriel Roubini’s firm has an opinion on when the Fed raises rates and the recent stock market volatility is likely to impact that decision. In this environment he looks to investment regions that are less vulnerable to U.S. rate rises.
Roubini: Investors focused on emerging markets, Fed tightening, but having trouble projecting duration and magnitude of tightening cycle
While pegging blame on the stock market's recent fall on China seems to be the pattern de jour, other investors question this hypothesis. The Roubini piece, while it mentioned China, did so by putting in perspective. “We do not expect a hard landing in China and feel that policy stimulus will continue to assist the growth and development path,” they wrote, noting that China’s much discussed currency devaluation was not a “currency war.” Speaking on CNBC today, former Philadelphia Fed Governor Charles Plosser, for instance, pointed out that there was nothing dramatically new in China that occurred this week, which has been dominated by Fed talk.
Because investors don't know when rates are rising, nor do they understand the potential timetable and magnitude of such rate rises, they have had difficulty pricing in a Fed rate hike into the stock market. Traditionally the first rate hike has carried with it the burden of pricing in subsequent rate hikes, which is why the first hike is often the most damaging for stocks.
Amid generally improving economic numbers, what has investors’ attention is emerging markets turbulence and the Fed’s tightening cycle, which has moved from September 17 to December and potentially beyond, the report said, focusing on the recent market volatility as the reason for such a delay. “There is a risk of further delay into early 2016,” as persistent dis-inflationary pressures may have made a delay until December “increasingly probable,” and slower-than-normal “normalization” path after the first hike is a near certainty.
Roubini: Economy "seems just strong enough" to raise rates
While the Roubini research indicates the U.S. economic engine “seems just strong enough” to raise rates in September, the market volatility that has occurred is reason to remain on the sidelines. While many investors and economists have claimed that there is little or no risk to keeping interest rates effectively near zero, Roubini observes the “risks of a delay have risen considerably,” as economic data, while strong, continues to come in murky.
After a rate hike, Roubini expects that a go slow and careful approach will follow. If the Fed hikes in September, they likely will not hike again until inflation is picking up and meeting or exceeding targets. “Due to the fragility of growth and burden of private debt, hikes will be slow and careful, and will probably end at a lower point than past cycles, with growth at a poorer level too,” they wrote. While the U.S. may be on a tightening cycle, raising the value of the dollar, “the European Central Bank and the Bank of Japan will probably need to ease more, in contrast,” which could lower the value of their currencies as well.
Roubini: investing implications include widening emerging market debt spreads, cautious approach to stocks
With all the talk of rake hikes, Roubini anticipates U.S. Treasuries to end 2015 at the top of the recent range, near 2.5 percent, with German bund yields and the Japanese ten year government bond ending the year just off the floor at 0.5 percent. In this environment, watch for emerging market debt spreads to widen and be cautious of equities, particularly those high-yielding U.S. defensive issues.
Exposure to U.S. rates should be on investors' minds. "Markets with high levels of foreign ownership tend to have higher beta to U.S. balance sheet vulnerability. Turkey, Mexico, Chile and Malaysia look most exposed, but Taiwan, India and Japan seem resilient," they wrote.
Disclosure: The author may hold positions in one or more of the companies mentioned in this article. This should not be interpreted as investment ...
more
They want to raise rates to show that they can but also so they can be lowered in downturn which might not be too far off. If rates were now 3% say (low by historical standards) they would be more likely to lower rather than raise them. That's the ugly truth and no one really can be sure where this is going but it doesn't look rosy.
The first chart is disturbing. Most of the world will be adversely affected by rising US interest rates. And that will somehow help us in the long run? Hmmm. Not that rising rates would not be good insurance against the next crash, but the Fed seems weak.