Last night the US Federal Reserve increase central bank interest rates by 0.25% pa to between 1.75% pa and 2.0% pa. In addition, it signalled two further rate increases later this year.
Interest rate increases are try and take the heat out of the economy and control inflation. Job’s figures are up and the economy is ‘booming’. Add to this Trump’s protectionist moves with trade tariffs may mean less imports as Americans are forced to buy more ‘American’ but it may equally make imports cheaper as the dollar strengthens. Taking a balanced view, this may not be good for emerging markets with trade restrictions.
In addition, with ‘Quantitative Tightening’ where the government buying back less government debt to reduce money into the economy, they will now be issuing more debt i.e. borrowing more. In short taking dollars out of the economy, reducing money supply as investors give them dollars to buy government debt i.e. lend the government money could make for an even more volatile year with many already worried about burgeoning US debt that could trigger a government debt ‘bond market’ bubble to burst.
The days of cheap borrowing for businesses may be over, borrowing costs are increasing and businesses will have to ‘stand on their own two feet’.
Meanwhile, looking at Europe. The European Central Bank has kept interest rates frozen and has not suggested it will cut back on its quantitative easing programme i.e. buying back government debt to release more Euro supply into the economy. Since 2015, this has now hit €3.25 trillion and still ongoing at €30 billion a month.
When interest rates increase expect stock market falls. In our opinion, Europe is deep in trouble but for the time being, markets will grow unless the US/Eur/China trade war moves up a gear.
We are still negative for Europe, UK and North America and can only see a volatile 2018. No doubt markets will stumble on the back of the overnight news today and again on Friday.