Global economic activity continues to expand at a robust rate, while US economic activity slows. Despite Brexit-related concerns and the recent general election, the UK economy is burning brightly, alongside that of the Eurozone and Japan. The world’s #2 economy, China is back to its best with an annual GDP growth rate hovering around the key 7% benchmark level. On Tuesday and Wednesday this week, the Fed FOMC will convene to discuss the state of the US economy, vis-à -vis economic growth, inflation, employment, and the impact that monetary policy should have on shaping the future direction of the world’s #1 economy.
Presently, the probability of a rate hike is above 99%, indicating that the federal funds rate will rise in the region of 1.00% – 1.25%. This is a significant milestone for the US economy, and the global economy, since it will generate greater demand for the USD. Traditionally, rate hikes price into markets well ahead of time. This means that the full impact has already been absorbed and we are likely to see only a modest movement on Wall Street and the USD.
Regardless, dollar-denominated commodities like gold, crude oil, silver, and copper will be impacted by the rate hike. From a purely economic perspective, the Fed rate hike should theoretically bolster the performance of bank stocks like Wells Fargo & Company, Bank of America, JPMorgan Chase, and Goldman Sachs. Of course, it’s the sentiment about the nature of the US recovery and the broader economic prospects that play a part too.
Mixed economic data in the US
Global reflation has been taking place for over a year now. For the most part, a firmer USD has characterized the markets since then, and rising inflation has been noted. For 2017 however, the USD has weakened. Much of this has to do with confidence levels in the current White House administration. Trump has been bogged down on most every major campaign promise, including the border wall with Mexico, immigration and security, rewriting the tax code, and an overhaul of Obamacare. The US dollar index (a measure of the USD against 6 currencies) is currently at 97.28, and down 4.98% for the year to date. This is significant. A weaker USD is an indication of a slight loss of confidence in the US economy.
