Morning Report Thursday 18 June 2015
The US Futures Markets are calling the US Central Bank to raise rates relatively rapidly, considering they have basically been at zero since 2008. Markets are factoring on one hike this year minimum and a second one late this year/early 2016. However it’s the three further rate hikes, yes 5 interest rate rises in total before Christmas 2016, that markets are forecasting which is catching my eye:
• A 90% chance of a rate hike in the second quarter of next year.• A 96% chance of a rate hike in the third quarter of next year.• A 90% chance of a rate hike in the last quarter of next year.
The US 10-year bond market has taken interest rates from below 1.5% to over 2.3% (chart 1) and this move has definitely contributed to the weakness in our “yield play” stocks e.g. Banking Shares. It does not feel to me that the US equity markets are on the same page and is factoring in 5 rate rises by the end of 2016. So far, US stocks have not marched to the usual tune, after a strong advance when an economy recovers/improves (“Phase 3”), there is usually a sharp correction (“Phase 4”) as interest rates rise, I am still forecasting a ~2000 point correction in the Dow for a buying opportunity – see chart 4.When we look at Australian short term interest rates it’s an interesting picture, they are almost factoring in one rate rise by the third quarter of 2016 but the RBA is still holding an easing bias – see chart 2.
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