Interest Rates To Increase
Rates look almost certain to rise in the US this week after the release of strong February data.
Non-farm payrolls jumped 235,000, well above the forecast of 190,000;
The unemployment rate fell again in February;
Average hourly earnings increased again; and
The annual growth rate rebounded to 2.8%.
We are monitoring US rates but don't think higher rates will spell disaster for US investments assets, as monetary policy is set to be tightened further against the backdrop of stronger US and global economies. So far, asset markets themselves seem unfazed. This is being driven by the realisation that global growth will likely be stronger than expected this year, which has helped boost equities since the beginning of the year. US CPI inflation numbers are also due out this week, and there is the possibility they will have strengthened to a 5 year high. This will add further fuel to the possibility of a rate hike.
Euro to keep dollar down
Despite the positive data, the US Dollar weakened last week. This followed comments by European Central Bank President, Mario Draghi, that the ECB no longer saw 'urgency' for further expansionary measures as the risk of deflation had been overcome. The retreat of the US Dollar reflected a 1.1% gain for the Euro. The ECB reiterated its commitment to buying assets this year and keeping interest rates at current or lower levels for an extended period. With growth in the Eurozone holding up well and headline inflation ahead of target, there is pressure for the ECB to provide forward guidance on interest rates. However, while the ECB believes that downside risks have diminished, it will apparently not taper its asset purchases or raise interest rates until core inflation, and particularly wage growth, are rising. As such, interest rates are unlikely to be increased in 2017.
Eye on Aussie Inflation
With inflation picking up globally, the Reserve Bank of Australia (RBA) will be watching the Australian market keenly as we tend to import inflation. Further, the RBA cannot use the terms of trade (which is strengthening) as an excuse to cut rates to weaken the Aussie Dollar and make Australia more competitive. This environment will prevent the RBA to reduce rates and our expectation is that the change will be a reate increase as early as next month!
#interestrates #inflation #RBA #heartmortgageservices
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