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Are markets ready for a US rate hike?
May 30, 2016, 2:16 pm

US stocks were buoyed by Yellen's comments on Friday and opening Monday while Japan's Nikkei registered its biggest gain in more than a month [Xinhua]

US stocks were buoyed by Yellen’s comments on Friday and opening Monday while Japan’s Nikkei registered its biggest gain in more than a month [Xinhua]

 

Revised figures for first quarter GDP growth in the US indicates the economy may be doing better than first thought and could give impetus to the Federal Reserve to lift interest rates for the first time since December.

The Commerce Department last Friday said that first quarter growth was revised to 0.8 per cent and not the 0.5 per cent figure initially reported.

It attributed the difference to a boost from the housing market.

While the figure remains the slowest pace of growth in a year, it was enough to prompt positive remarks from St. Louis Federal Reserve President James Bullard who said Monday that markets are ready for another rate hike.

“My sense is that markets are well-prepared for a possible rate increase globally, and that this is not too surprising given our liftoff from December and the policy of the committee which has been to try to normalize rates slowly and gradually over time,” Bullard said during a presser at a Bank of Korea forum in the capital Seoul.

However, he would not commit to an expected date for the hike and said he would need to see more data and more encouraging news about the US economy before making a judgment call.

His comments come on the heels of equally cautious remarks made by Fed chief Janet Yellen on Friday when she said that market conditions were such that it would be “appropriate” to raise interest rates in the coming months.

But she reiterated that this would have to be done “gradually and cautiously”.

US markets reacted positively at open on Monday: The Nasdaq Composite was up 0.65 per cent to 4,933.51 at press time.

The S&P 500 also rose by 0.43 per cent to 2,099 while the Dow Jones Industrial Average was up 0.25 per cent to 17,833.

But emerging markets, which make up about 40 per cent of the global economy, face volatility every time there is hint of a US rate increase.

On Monday, the MSCI Emerging Markets Currency Index fell 0.3 per cent in London on Yellen’s comments.

The US Federal Reserve’s cautious stance on rate hikes in 2016 has been a boon for emerging markets, analysts say, because the less likelihood of an increase the more likely capital inflow into these economies.

When the US ended its quantitative easing stimulus program, nearly a trillion dollars exited emerging markets and returned to the US and Europe.

The Fed’s shift toward a rate hike has been good news for Japan, however. The Nikkei closed 1.45 per cent up, passing the 17,000 mark for the first time in 32 days. The yen, which had stymied analysts as it grew against the dollar, also suffered its worst decline in a month.

The news of a likely US interest hike in the summer coupled with Tokyo’s likely delay of a controversial consumption tax helped buoy the US dollar in Japan.

The BRICS News with inputs from Agencies

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