The US Federal Reserve estimates the “natural” rate of unemployment stands between 4.9% and 5.2%.The current rate of US unemployment is 5.1%. Monetary theory therefore dictates that interest rates must be raised. However, the Fed is in no rush to do this and forecasts the unemployment rate for 2016 to drop below this “natural” rate. It is therefore quite clear that monetary policy will be governed by concerns about financial stability and not by fears of inflation; as has been the case for the past few decades. Fed Chair Janet Yellen is truly biased in favour of “lower for longer”. I find it hard to believe interest rates will go up this year. My guess is you will see the first rate rise in the US in Q1’16. Additional Renminbi (RMB) devaluation is coming. However, crucially, as the last few weeks have shown, the People’s Bank of China has the capacity to keep the RMB stable. The Chinese government aims to stabilise GDP growth at “around +7%” by carefully increasing fiscal support via infrastructure investment. There is room given its relatively small share of overall fixed asset investment of 17.5% compared to the historic share of approximately 25%. Around 15% of China’s population are rural migrants living for at least six months in urban areas. By gradually being recognised as urban residents, they will become more likely to buy a property, send their children to school and become part of the Chinese urban consumption economy. Urbanisation and the growth of the middle class with spending power are ultimately the key to China’s transition to a consumption-driven economy. China’s fifth Plenum starts in two weeks time. Decisions made and political agreements forged there, should remove a key obstacle to business and government investment. I expect China’s data to reflect a positive turnaround by the end of this year and to firm up further in Q1’16.
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