FED’s Rate Hike, US Quarterly GDP

July 24, 2015

Next week is going to be absolutely crucial for the USD as we have several key marco data releases that could have a significant impact on FED’s rate hike decisions. On top of that, today’s Markit Flash Manufacturing PMI from China confirmed that the slowdown there is getting more severe, adding fuel to all sorts rumours and suspicions regarding the actual health of the Chinese economy.

At the moment it is not clear how much the slowdown in Chinese economy affects FED’s decisions but one thing is more than sure – if China goes into recession, then chances are that the rest of the world will follow fairly quickly. Also do not forget that most major central banks keep their interest rates close to zero which means that if another economic crisis hits the world today, then there is very little the central banks can do, besides lauching massive QE programs to create more artificial wealth and in the end risk with hyperinflation.

Next week we have the FOMC Statement, Federals Fund Rate and most importantly, the release of the US 2nd quarter GDP figure. From the first two events, I do not expect much as most likely the Statement will not reveal anything new and the Federals Fund Rate will most likely remain at current levels. However, the GDP release is a totally different story.

The official forecast is that the US economy expanded by 2.5% in the 2nd quarter, which is a huge leap compared to the previous quarter (-0.2%). It is quite certain that we’ll see a positive figure but it has to be a fairly strong number to justify a rate hike this year. I’d say if the print is below 2% then the whole liftoff plan becomes even more questionable.

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There is one more thing I’d like to point out and that is the FED’s credibility. Ms. Yellen has been talking about the liftoff for almost a year now and sooner or later we are going to reach a point, where FED has to make a move regardless of the situation and simply push the rates higher by 0.10% or 0.25% or admit that they are not going to do anything in the foreseeable future.

Capital Properties FX
24.07.2015
Kaarel.

Capital Properties FX