What The Global Interest Rate Movements Can Tell You About The Future
The most trending news of the past weekend has been Leicester’s win at the Premier league.
Even if you don’t watch soccer, I’m sure you would have heard or seen a little snippet of this headline news, either on your Facebook newsfeed, on the radio or on the newspapers. The phrase “Leicester City Champions of England” took over twitter feeds as the 17th most retweeted post ever with 400,000 tweets.
Talk about long shots, this team had been given odds of winning the title at 5000 to 1 at the start of the season. But in the financial markets, there is another long shot in the works, and it’s the type which could be remembered as the “Trade of the Year” for 2016.
Around the world, central banks have been cutting interest rates this year.
In the the current age, most central banks adopt a combination of classical and keynesian schools of economic thought. Through the experiences of last century, they believe capital markets are self-correcting in the long run, it supports government intervention in the immediate term, to smoothen out the small fluctuations in the economy.
The definition of a short term fluctuation can vary, which is why we see many Central Banks adopt quantitative easing during the recent financial crisis. The magnitude of government intervention is unprecedented. The US accumulated 15 trillion dollars of debt during the process and it is yet to be seen how the US will recover from the massive debt.
Many speculate that what comes next is a major down cycle the in the global economies. There are many factors which point in that direction, slowing growth in China, not to mention their own debt bubble, divergences between equity markets and yields and the most obvious sign, many central banks around the world are cutting interest rates.
Now these interest rates aren’t the same as what you get when u take up a mortgage from the banks, it’s actually known as a discount rate. You can read up more about it at investopedia.
If you take a look on fxstreet website, you’ll be able to see the recent changes to the interest rates made by central banks around the world. Another good resource is the tradingeconomics website which has historical economic statistics of numerous countries. Among the major Central Banks which have cut interest rates this year are, Reserve Bank of Australia, European Central Bank, Bank of Japan and Reserve Bank of New Zealand.
Others include India and Indonesia, over in Europe we have Sweden and Norway, In the Americas we see Mexico cut rates this year as well.
The Shot at the Moon
If you think about things physically, economies are bodies with enormous masses. So for these bodies to change direction, it would usually take some time. Central banks need to manage these bodies and steer them along.
So any changes in direction would need to be made gradually rather than abruptly. This means that if a central bank is raising rates, it would be unlikely for them change their stance and start cutting rates half a year later. Unless, of course, there was a dire need to adjust to a fast changing crisis level economic environment.
In the midst of all this, late last year the US Federal Reserve raised their interest rates for the first time since the 2008 financial crisis. Now they are delaying plans for raising the rates further in 2016.
While there seem to still be plans to raise interest rates in June, I am rather skeptical that it will happen at all. Could this be the start of the Fed changing their stance on raising interest rates? Why would the US raise interest rates when a global economic down cycle seems imminent?
Is the US economy immune from a global slowdown in growth?
It’s NFP week folks, I believe this piece of news will be closely watched.
Just like the Leicester win, US continuing to raise rates looks like a long shot at the moon, but it could definitely still happen!
Trade safe folks!