Saturday , 10 December 2016


Two Interest Rate Hikes, Rather Than One, Could Be In The Cards – Here Are The Ramifications

A number of officials from the central bank have already suggested that two rate rises are possibleInterest-Rates this year, and now economists and investors assessing the economic data are also leaning in favor of two hikes.  The quid pro quo for rising interest rates is a strengthening US Dollar Index and if that does indeed happen then it would really hammer Wall Street equities – especially high-yielding dividend stocks.

The comments above and below are excerpts from an article by I.M. Vronsky (gold-eagle.com) which have been enhanced – edited ([ ]) and abridged (…) – by  munKNEE.com (Your Key to Making Money!)  to provide you with a faster & easier read.

  • San Francisco Fed President John Williams has said his preference would be for two rate hikes before the end of the year, echoing comments he made in June.
  • Fed governor Jerome Powell has also said he was prepared to raise interest rates twice this year in September and December as long the economy continues to perform as expected…
  • Senior foreign exchange strategist at ANZ, Khoon Goh, told CNBC; “My base case is they hike in September, with two hikes before the end of the year. The market is not really fully priced for that, so a hike in September will be dollar positive. I think for September, the market is only about 10 basis points priced in, meaning a large portion of the market are not positioned expecting an interest rate rise, which could push the dollar index against a basket of currencies above the 100 level, up from its current levels of 96.5.”

Without question the Fed is slowly and methodically raising the Fed Funds Rate [as can be seen in the graph below,] which is driving the US greenback higher.  Moreover, we may count on this hawkish Fed policy to continue for the foreseeable future…[as] Fed Chair Yellen… “orchestrates” her future legacy.

…As the Fed Funds Rate increases, thus fueling higher levels of short-term US Treasury Yields, the US Dollar Index will continue to rise with a possible price objective of 120 sometime in the near future. As history is testament, the quid pro quo for rising interest rates is a strengthening US Dollar Index.

Conclusions

In the event interest rates continue to swing higher (as the above analysis indicates), it would really hammer Wall Street equities – especially high-yielding dividend stocks.

  • The 2009-2016 bull market in stocks is possibly one of the longest in financial history [and,] to be sure, ALL bull markets eventually and inevitably end – and are usually followed by substantial corrections:
    • The 2000-2002 Bear Market saw the Dow Index drop approximately 40%
    • the 2007-2009 Bear Market slammed the Dow Index down 54%.

To be sure, a new Bear Market in stocks might see the Dow suffer an egregious loss by plunging down to retest its March 2009 low at 6500 [which] is a plausible forecast…[given that] the price earnings ratio of the S&P 500 Index is at 25:1 today which is higher than it was in October, 1929, just before the horrific crash that hammered stocks down 89% during the following three years.

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