All eyes on Fed rate hike

Instreet Market and Economic Insights

The main game in December will be the expected rate hike by the US Federal Reserve. Fed Chair, Janet Yellen, has acknowledged that the unexpected weakness of core inflation this year “could reflect something more persistent”, however she points out that it is likely due to “transitory factors”. This view, along with the boost to activity from US tax reform, leads us to believe that the Fed will raise rates four more times in 2018.

The US Senate passed the Bill for tax reform on the weekend, paving the way for change in the US tax rules. The House and Senate now need to reconcile their Bills and there is a 90 per cent probability that it will go through. Whilst the final details are not yet known, the market is hoping for a corporate tax rate of 20 per cent.

Bubble troubles

There has been some volatility in the NASDAQ 100 Index this week, which has spread to the rest of the world’s tech stocks. IT-heavy indices in Southeast Asia have also been hit.

The risk of a dot.com crash happening again appears, on the face of it, to be relatively small. The share prices of US IT firms have not risen as much over the past five years as they did in the second half of the 1990s. Plus, current valuations are generally in line with those of the broader stock market.

The bigger bubble forming today is that of Bitcoin, which has surpassed another milestone – eclipsing $11,000. In less than a year, the cryptocurrency has risen eleven-fold and google searches for ‘’bitcoin bubble’’ have increased dramatically.

To put these gains into perspective, it took the NASDAQ 100 Index five years in the second half of the 1990s to rise this much – not one year.

It’s impossible to say how long Bitcoin mania will last for. But, of course, bubbles do tend to burst.

Oil prices steady

Oil prices remain unchanged after OPEC’s meeting on Thursday as the organisation’s plans were broadly in line with investors’ expectations. OPEC announced that, along with Russia and some other non-OPEC producers, it will extend output cuts by nine months until the end of 2018.

The 40 per cent or so increase in oil prices since mid-June has probably given the energy sector of the US stock market a bit of a lift. But it certainly hasn’t been the biggest driver of strength – with the IT and financial sectors performing a lot better.

Oz wrap

The Reserve Bank of Australia will almost certainly keep interest rates at 1.5 per cent when it meets on Tuesday.

We anticipate that October’s retail sales figures will show that consumer spending has continued to struggle. Meanwhile, on Wednesday, we expect GDP figures for Australia to show a slowing in growth to around 0.5 per cent quarter-on-quarter in Q3 as consumption growth eased.

 

 

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