Markets Insight

After the storm, time to mull over US rates

US growth in the second quarter was boosted by gross private domestic investment, including higher construction spending.
US growth in the second quarter was boosted by gross private domestic investment, including higher construction spending.PHOTO: REUTERS

US jobs data to be released on Friday could be vital to timing of the Fed's first rate hike

As relative calm settles in after last week's roller-coaster gyrations in global equities and currencies, markets this week are likely to be mulling over United States interest rates.

They will be weighing the likely timing of a US rate lift-off after Federal Reserve vice-chairman Stanley Fischer left the door open for the first rises to come next month.

In a speech at an annual economic conference in Jackson Hole, Wyoming, on Saturday, Dr Fischer said there is "good reason to believe that inflation will move higher as the forces holding down inflation dissipate further".

The effects of a stronger dollar and plunging oil prices - key factors in holding down inflation - have already started to diminish.

Brent crude oil finished 5 per cent higher on Friday at US$50.05, (S$70.50) after reaching nearly US$51 a barrel. It gained 10 per cent on the week. US crude snapped an eight-week losing streak, climbing US$2.66 or 6.3 per cent to settle at US$45.22 a barrel.

WATCHING THE NUMBERS

There's still three weeks to go before the Fed meeting. If markets settle down, a September rate hike is still in the cards. There's inflationary pressure because US growth is still gaining traction.

CMC MARKETS ANALYST NICHOLAS TEO

Rising oil prices are likely to keep boosting local offshore marine, oil and gas counters, which already started to rebound last week.

Keppel Corp jumped 8.5 per cent to $7.04 on Friday from its 12-month low of $6.49 on Black Monday, while Ezra soared 24 per cent to 12.2 cents from its 12-month low of 9.8 cents on Monday.

Investors have been trying to determine if the Fed might still be on course to raise rates after its Sept 16-17 meeting, given recent turbulence in financial markets and concerns over China's slowing growth.

More volatility is expected towards Friday when US non-farm payrolls data is released.

Economists now see the first rate hike coming next month if the August US jobs report is strong, and global financial markets continue to settle down.

"But after the Fed didn't dismiss that possibility over the weekend, the rate hike is now back on the table as a new event risk," CMC Markets analyst Nicholas Teo said.

"There's still three weeks to go before the Fed meeting. If markets settle down, a September rate hike is still in the cards.

"There's inflationary pressure because US growth is still gaining traction. Its second-quarter gross domestic product was better than expected," he said.

The second-quarter growth improvement was driven by more robust personal consumer spending and higher government spending.

But the biggest lift came from gross private domestic investment which posted growth of 5.2 per cent owing to higher construction spending, spending on intellectual property products and a build-up of inventories, according to UOB Global Economics & Markets Research.

"In fact, contributions from investments could have been higher if not for the pullback in investment from the oil and gas industry," UOB said.

Investors are also watching for China's official manufacturing Purchasing Managers' Index data tomorrow and Singapore's PMI and Electronics Sector Index data on Wednesday.

IG market strategist Bernard Aw noted that after the substantial upward revision in second-quarter US GDP, "every major US data point would be important to the data-dependent FOMC, in the run-up to the September meeting".

Looking ahead, investors are watching for US manufacturing PMI, construction spending, job figures, and trade balance.

The European Central Bank will have its monetary policy meeting on Thursday, while the G-20 finance ministers and central bank governors will meet on Friday.

A version of this article appeared in the print edition of The Straits Times on August 31, 2015, with the headline 'After the storm, time to mull over US rates'. Print Edition | Subscribe