The New York Fed’s president has cast doubt over whether the U.S. will raise rates in September.
“At this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago,” said New York Fed president William Dudley, as reported by Reuters. But a hike “could become more compelling by the time of the meeting as we get additional information on how the U.S. economy is performing and […] international financial market developments, all of which are important to shaping the U.S. economic outlook.”
As of yesterday’s close, the CME Group FedWatch pegged the odds of a September rate hike at 23.57%, down from 25.71% over the previous month. After today’s news, CNBC reports, RBS said the futures market anticipated a 20% chance of a September hike.
Delayed tightening would impact the U.S. dollar first, says Luc de la Durantaye, managing director of asset allocation and currency management at CIBC Asset Management. “The dollar has been strong against G10 currencies because the Fed [has been] expected to raise rates. So investors should hedge their long U.S. dollar positions.”
Another hedge could be investing in emerging market debt and equities, since delayed tightening, he says, “would create some relief for emerging markets.”
Here at home, the outlook for a rate cut is less decisive.
Scotiabank’s Derek Holt writes in a morning note to analysts, some overnight markets “have it as a coin toss whether the BoC cuts again [in] October, with lower odds for September and higher odds at later meetings.”
He says the reasons BoC may cut are:
- To boost the economy since oil prices are still low. “We can argue cuts won’t do a thing about this, and that 85% of the economy lies outside of the energy sector […] but the BoC seems to think otherwise,” he writes.
- To shore up confidence in light of recent market turmoil.
- To de-risk the housing market. But, Holt is skeptical of this move. “The more housing stimulus Canada continues to apply in the short-term, the greater the likelihood that we enter a void in demand marked by transferred demand to the present.”
Some reasons the reasons BoC may not cut are:
- To provide more maneuvering room as they get close to zero, especially because “the blowback on Ottawa for [going into negative territory] could be quite intense.”
- To avoid making a cut too close to the October 19 federal election.
- To account for as-expected June macro data and the five-cent depreciation in the CAD since the July cut.
- To evaluate the effects of July’s rate cut.