Aug 29, 2016

    Investors still clueless over US rate hike timing

    INVESTORS fretting over the timing of the next United States interest rate rise are not much the wiser after Federal Reserve chairman Janet Yellen's speech last Friday.

    Yes, she tabled a stronger case for the Fed to normalise US rates from their historic lows but jittery markets are still left wondering just when rates will head north.

    In her speech, Ms Yellen said recent improvements in the US labour market and wider economy have made a hike more likely.

    But she stopped short at giving an indication of timing, only describing the path of rises as gradual.

    Market estimates place the next hike closer to the year-end or even early next year. Bank of Singapore chief economist Richard Jerram expects one hike in December, then two to three more next year.

    "The Fed has a problem with its communications policy and the market impact will be limited as a result. My sense is that the Fed is like the boy who cried wolf," he said.

    "So many times over the past year, they have suggested that a rate hike is imminent and then backed away for one reason or another.

    "I doubt they will hike in September," he added.

    But this also means an unexpected hike could spell trouble. "The market is not fully prepared for a September rate hike and thus any hawkish surprise could dampen fragile sentiment, potentially leading to panic selling," said CMC Markets analyst Margaret Yang.

    The initial market reactions were measured. After Ms Yellen's speech, the US dollar rose 1.3 per cent against the Japanese yen and 0.42 per cent against the Singdollar, while gold pared 0.06 per cent against the greenback.

    The Dow Jones Industrial Average fell 0.29 per cent.

    In Singapore, risk appetite has been low with the benchmark Straits Times Index dropping 0.67 per cent on Friday.

    For the week, it added 0.48 per cent but the five-day volume slowed to a trickle, with only 606.8 million blue chip shares traded.

    Investors will now wait for the US August job data out this Friday, which is expected to come off from July's surprisingly strong number.