Over the past months market participants were anxious awaiting any form of communication of when the Federal Reserve (Fed) will act and hike interest rates for the second time, following the first rate hike since 2008 which occurred in December 2015.

Yields across the fixed-income asset class were being very sensitive as participants were digesting all sort of information.

On Wednesday, the Fed released the minutes for the gathering held in September, in which several FOMC members saw rate rise relatively soon. Could this be December?

Undoubtedly, despite lately mere soft data might have weighted negatively on policy makers, all in all, the trend of positive data in the United States has been consistent. This is also the positive vibe being expressed amongst the majority of members which are still forecasting one rate hike this year.

That said, mutual consensus among all FOMC members is still at a dissenting phase. In fact, the more dovish members are still concerned about the implied effects on the US economy from slowing Asian growth, the Brexit uncertainty and mainly inflation, which is still below the two per cent target.    

The latest non-farm payrolls were below market expectations at 156,000, pushing the average this year to 178,000 compared to 229,000 last year.

Yes, that was a soft figure when compared to expectations, however realistically, with some exceptions in data points, consistency has now been experienced for the past year. Another important factor to point out is that people are now more comfortable searching for a job, with the participation rate now ticking at the 62.9 per cent, the highest rate since April 2016.

However, on the contrary the recent slight slowdown in capacity utilization, which is a measure at which potential output levels are being met or used, might be seen as a deterioration in manufacturing output due to the expectations of lower demand. Usually, at an 80 per cent level companies commence expanding through further capital expenditure.

What is sure is that the Fed is still strongly data dependent, however other factors such as the upcoming Presidential election and the harm of low interest rates on the financial system are surely being given remarkable diligence.    

Interestingly enough is the fact that market participants are building momentum for a December rate hike, with the probability now standing close to 70 per cent following the released Fed minutes, up from the circa 59 per cent in the initial days of October.

Furthermore, over the past days the dollar strengthened by over one per cent in against the euro, while it also gained against major emerging market currencies.

In addition, yesterday the Treasury Department auctioned USD12bn of 30-year bonds at a high yield of 2.47 per cent, from lows of 2.29 per cent as at the end of September. Surely another sign that investors are now more convinced than ever for a hike this year.

As I have opined in my previous articles, my view is that a rate hike this year is more realistic and thus investors should expect some sort of correction going forward. Indeed yesterday equity markets turned in the red, while the dollar maintained its strengthening path.

Moving forward, a rate hike usually would imply a sell-off in the short-term, however over the longer-term, based on historical data, we should experience a recovery primarily in both high yield debt and equity markets.

In my opinion, rational investors who are comfortable that the Fed will hike in December should consider buying dollar currency as an asset in their portfolio, while only invest the converted currency on the possible market correction following the December hike. Undoubtedly we are heading towards interesting market paths in which investors should be aware that volatility might be the order of the day.

Disclaimer: This article was issued by Jordan Portelli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website. 


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