Consumer spending could trigger US rate hike despite election - Thesis AM

Added 25th August 2016

The Federal Reserve is keeping the door open for an interest rate hike later this year despite uncertainty caused by the presidential election, according to Thesis Asset Management.

Consumer spending could trigger US rate hike despite election - Thesis AM

“Key employment indicators continue to show the labour market is moving in the right direction,” said Ryan Paterson, a research analyst at Thesis AM.

He pointed to data showing domestic consumer spending on the increase and both the manufacturing and services segments of the economy being in expansion mode, even though the August Empire

State manufacturing survey “appeared to be a soft spot”.

“After a dismal May report, this news lifted the US stock market which continues to post impressive gains, reaching a new all-time high,” said Paterson.

With the US presidential election on the horizon Paterson believes we could see markets display volatility similar to that seen in the lead up to the EU referendum, however.

“Following Brexit, the next such event to create uncertainty is the US presidential election, where a Clinton win would currently be deemed to pose a lot less risk than a Trump win,” he said and added that as opinion polls move around it is probable that markets will continue to be volatile in the build-up.

Thesis AM will be paying close attention to the US bond market, as improving economic data has increased the chances of another US interest rate hike before the end of the year. The market seems less convinced however, noted Paterson.

“While odds of a rate hike have moved forward, Fed funds futures still fall short of pricing a rate hike this year. Some economists suggest the presidential election, dovish central banks elsewhere and global headwinds may still hold the Fed back in the coming months,” he said.

Paterson expects Fed Chair Janet Yellen to use this month’s Jackson Hole address as an opportunity to reaffirm the probability of rate increases by year end.

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