Kuwait: October 7, 2018
FED HIKES RATES AMID ROBUST ECONOMIC DATA; EUROZONE EXPORT SECTOR WEAKENS
After the turmoil in various emerging economies that rocked financial markets in August, global conditions were slightly firmer in September and early October, with the embattled Turkish lira staging a partial recovery following the announcement of the government’s support package, and crisis-hit Argentina securing additional bailout funds from the IMF. There was also some positive news on global trade, with the US and Canada agreeing a revamped NAFTA deal (now titled ‘USMCA’) and some analysts hoping for a modest de-escalation of US-China tensions after the US congressional elections in November. Benchmark government bond yields shifted significantly higher on strong US economic data and on the continued gradual withdrawal of global market liquidity as monetary policy is tightened.
Buoyed by strong economic growth and inflation at close to the 2% target, the Federal Reserve took a further step on the path of monetary normalization by raising interest rates by 25 bps to 2.00-2.25% at its September meeting, the eighth hike of the current economic cycle. In a fairly bullish assessment of the outlook, the central bank also upgraded its growth forecasts for this year and next, removed its commitment to maintain an ‘accommodative’ policy stance and signaled the likelihood of one further rate hike this year and three in 2019. Financial markets took the widely-anticipated move more or less in stride at first, relieved that the Fed did not outline a still-more hawkish set of projections.
Global equities continued their winning streak for the third straight month in September closing 0.3% in the green as measured by the MSCI All Country World Index. For the quarter, the index closed up 3.8%. In the US, both the Dow Jones and S&P 500 were up for the month 1.9% and 0.4% respectively while for the quarter, the indices were up 9.0% and 7.2%. During the month, President Trump was able to come to an agreement with both Mexico and Canada to replace NAFTA with a new trade agreement, while implemented additional tariffs on Chinese products valued at USD 200 billion. The Federal Reserve met towards the end of the month and increased its fed funds rate by 25 bps as was widely expected and provided guidance for potentially one more hike in 2018 and possibly three in 2019.