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US INTEREST RATES & CHINA -THE KEY

Yellen’s comments ‘too little too late’

by Robin Christie | 30 Sep 2015

US Federal Reserve Chair, Janet Yellen, may have reassured markets that interest rate rises are on the way, but investors are already spooked.

According to Instreet Investment Managing Director, George Lucas, Yellen may have signalled that the Fed will raise rates this year, but the US central bank’s failure to make a move this month as expected has reinforced investor concerns about the health of the world economy – particularly China.

“Yellen’s recent comments calmed markets, but it seems to be a case of too little too late. If the Fed really wanted to alleviate concerns, it should have hiked rates at their meeting,” he said.

“Yellen’s caution that a rate rise in 2015 may fall over if there are any economic surprises probably didn’t help either.”

Catch 22

Steady US rates simply aren’t good news for global markets, he said, but the Fed is still holding fire and keeping an eye on global market volatility despite strong economic conditions at home.

“The US is experiencing strong growth and strong employment. So much so, second quarter growth was revised up to a strong 3.9 per cent and the next employment report is meant to show gain of 200,000 in payroll employment,” he said.

“It begs the question why interest rates are at zero and what needs to happen for the Fed to raise rates. Firstly, volatility in the market will need to reduce. And secondly, we’ll need to see signs that Chinese growth has stabilised.”

However, this scenario is something of a catch 22, he said, because the Fed failing to raise rates adds to market uncertainty and means every piece of data coming from China will be scrutinised.

Look at the wider economy

With the Chinese economy under the microscope, Lucas said that its flash purchasing managers’ index (PMI) falling from 47.3 in August to 47 in September continues to spook investors.

The drop in the PMI – a key measure of manufacturing sector activity – was mostly driven by declines in output and new orders, he said. However, this recent weakness in manufacturing doesn’t corresponded to a fall in broader economic activity once the services sector is taken into account – so a deepening Chinese economic crisis isn’t necessarily on the cards.

PMI figures for other major economies have also taken a hit, he explained, with export-orientated countries such as Japan and Germany joining China in this regard. Once again, however, Resnik pointed to the importance of looking at the bigger economic picture in these countries, and taking the better performing services sector into account.

As an aside, he also pointed to the possibility that another US federal government shutdown could affect the markets. With the US Congress needing to pass a continuing spending resolution to keep the federal government open, he explained that the country’s debt ceiling must be raised soon to avoid another crisis over a potential debt default taking place in the next few months.

That said, he pointed out that the market believes the likelihood of a government shutdown has been reduced after the Speaker of the House, John Boehner, stepped down