Jun 6, 2016

Global Economic Trends: Fed Interest Rate Hike on the Horizon

In this video blog, Vice President of Business Development and FX expert Udi Sela explores a number of global economic issues including the likelihood and timing of a rate hike by the US Federal Reserve, negative bond yields and a negative rate environment, currency trends, commodities demand, inflation and investment opportunities.


Jim Jockle (Host): Hi, welcome to Numerix video blog, I'm your host Jim Jockle. Fed Funds back in the news again this week against a disappointing jobs report. To talk about this today and other trends in the global economy, Udi Sela, Vice President of Business Development for Numerix and EMEA is joining us from France. Udi, how are sir?

Udi Sela (Guest): Very well, thank you Jim. How are you?

Jockle: No complaints, no complaints. So clearly jobs numbers came out, not what we were expecting. What is the near-term implication from the perspective of potential rate hikes as it relates to the Fed Funds?

Sela: Yes, so Jim, the report came out last week on Friday. The market was expecting 204,000 new jobs; eventually the number came at 160,000 and that was the major disappointment for the market. As a result, immediately, the market is now discounting one rate hike. So instead of two, just one and instead of June, now the market is expecting the rates hike to come around September, some speculated it will be July, I personally think it will be in September.

Jockle: Yet, but amid the fact that across of the world we’re still seeing some rates going down. I think most recently the Australian Dollar has also seen a dip in yields.

Sela: Yes, of course that is very true. I guess Australia is still sobering up from the end of the commodities boom and from a weaker demand from China (because China is probably the biggest trading partner of Australia). As a result, there is less Chinese investment in Australia and the economy is slowing down. In order to try and boost the economy, the Australian Central Bank has actually lowered the rate last week, I think it’s now 1.75%, the lowest level historically. As a result, the Australian dollar weakened from levels of about 76 cents to the dollar to 73.

Jockle: So the question I have to ask is, it seems to be one of your favorite words lately, is inflation. So, obviously we’re seeing a slower growth in Australia due to China, China’s been coming down a little bit, Job Numbers not performing in the US, where is your perspective and your fear as it relates to a potential inflationary environment?

Sela: Yeah, so I mean, 2-3 years ago we were fighting the previous war instead of the new war, which is really increasing demand and appetite for making investments. And of course the theory that people delay their consumption decisions because they believe that the futures would be cheaper to consume. And of course there’s more fear, if you like, in terms of job security, etc. People are much more reluctant to consume and the fact that we have historically low yields across the board, a lot of people were using cheaper funding for refinancing existing investments at lower funding rates, but now it’s like someone has almost overdoing the impact. So the low rates don’t really transition into stimulating the economy. And that is going to add technological changes; make many job types redundant. We even see that in our industry where in some places, machines replace people (e.g. market making). Or investment decisions like algorithmic trading.

Jockle: So, staying on investments vs consumption as this point, because clearly there’s going to be an ongoing challenge in consumption, extension of credit is being challenged. But on the investment side, where are we seeing the monies? Given the rate news in unemployment we’re not seeing a flight to quality as it relates to UST, negative bond yields are continuing to challenge performance and equities are still kind of on the upside, but there’s always talk about a bubble. So where is the money going right now?

Sela: So, that’s a question we all ask ourselves. One thing is real estate, right. If you look at prices in the big centers, like New York, London, even we mentioned Australia, Sydney right. We see money coming out of China, going to Hong Kong, that’s one thing. You mentioned equities, one of the things I look at with equities is what the market calls dividend aristocrats. And if you would compare the S&P to the dividend aristocrat, you would see that the premium, or the alpha, is generated. And, of course, some asset managers, those that can take only very minimal risk, they basically invest in yields. Even the credit spreads have tightened again. The spreads were opening with mostly credit related to oil companies, especially in the US and even there we see a comeback.

Jockle: So I’m going to pin you down a little bit here right, so on one side of the coin we’re concerned as it relates to job security and investment, yet we’re still continuing to see rising real estate prices. What is the concern as it relates to another bubble?

Sela: Well, it depends where the money comes from. A lot of money which is investment money which is known, declared, etc. that does go into the legitimate real estate purchases, right. We have to look at for instance, one of the things people do, is luxury prices go really high and at the same time middle class, citizens of London for that matter, is being pushed out. You know, what they call gentrification. And, in China specifically, there is tighter control that the central bank sees over the last few months to support the local currency, the Yuan, which is weakening against the dollar. So the way people overcome currency controls is by issuing invoices out of Hong Kong, so this money is notably used to purchase real estate in Hong Kong, and you can follow the real-estate prices there for that matter.

Jockle: So my key takeaway Udi from you is that there’s no new Tesla under the Christmas tree this year. Udi I want to thank you so much for your time. And of course we always want to talk about the topics that you want to talk about, so, for the first five people to shoot me an email, we want to see you sporting around in a nice Numerix hat this summer, in support of the Numerix video blog. Shoot me an email and the first five people we’ll send you a nice hat. And of course follow us on LinkedIn and on Twitter @nxanalytics, Udi thank you so much for your insights and I hope we’ll talk soon.

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