February in financial markets – equities, lower-rated corporate bonds and commodities. The sell-off was based on misplaced fears of recession in the US, added to concerns about the continuing slowdown in China and its impact on commodity markets. These anxieties proved to be misplaced principally because the key drivers of the US economic recovery remained intact.
Influenced by the weakness in financial markets and indicators such as “financial conditions”, the Federal Reserve’s Open Market Committee (FOMC) postponed a widely anticipated interest rate hike in March. Instead they published FOMC members’ Fed funds rate expectations showing only two rate hikes during 2016 compared with four rate hikes implied by the December “dot plot”.
However, as I explained in December, the key indicator to watch was the rate of growth of bank credit. The US is the only major economy where bank credit growth has returned to normal. Even since the December rate hike total bank loans have continued to grow at over 8% p.a. to mid-March. This, together with balance sheet repair in the private sector, has enabled US equity markets to shrug off the early phase of interest rate hikes and return to end-December levels.
By contrast, the Eurozone and Japan are still in the midst of extended programmes of quantitative easing (QE) intended mainly to keep interest rates low along the length of the yield curve (rather than directly to boost the rates of growth of money and purchasing power), and hence to stimulate the two economies.
Source : Invesco Real Estate