Does GDP revision make December US rate hike more likely?

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The upward revision of US third-quarter GDP figures may suggest a rate rise is imminent, but the Federal Reserve will remain conscious of the global economic headwinds as well as other economic data, experts say.

US gross domestic product grew at a faster rate than predicted in the third quarter, rising at a 2.1 per cent annual rate, higher than the 1.5 per cent predicted a month ago, the Commerce Department revealed today.

The economy growing at a faster than expected rate has added fuel to the expectation of a December interest rate hike by the Fed.

AJ Bell investment director Russ Mould says the upward revision to the US GDP figures can build a case for a hike in rates, but other data continues to give a mixed picture of the status of the economy.

He says: “Lagging indicators such as GDP and employment are strong, while concurrent indicators such as industrial production and retail sales are mixed and leading ones such as sentiment surveys and PMI reports look soft on forward-looking signals like orders and pricing.”

Close Brothers Asset Management chief investment officer Nancy Curtin says the upwards revision for the third quarter figures “will hardly set the world alight for investors”.

However, there are positive signs elsewhere, she says. “It is the most recent data coming out of the US that has cemented confidence in its economic momentum. Jobs figures for October smashed expectations, while consumer sentiment remains strongly upbeat.”

The number of jobs created in the US over the past month rose to 271,000, way above the consensus of 182,000 economists had anticipated. The unemployment rate also fell to 5 per cent from 5.1 per cent in September.

Members of the Federal Reserve have suggested they want to hike interest rates in December, following minutes of the central bank’s October meeting.

Fed officials have said it might be appropriate to increase rates from near-zero levels next month provided there were no “unanticipated shocks”.

The minutes showed that conditions for beginning the policy normalisation process “may well be met” by the meeting next month.

In particular, Fed officials said the jobs market is improving and inflation is starting to move towards their 2 per cent annual target.

Curtin says the rate hike has to happen in December, and the market will be prepared.

She says: “We don’t expect this to startle markets. Not only has it been on the cards for quite some time, but the Fed has repeatedly reassured that rate rises will be steady and incremental, rather than sharp and substantial hikes.”

Mould adds the current dollar strength suggests the markets are “gearing up” for a rate increase.

He says: “Investors may even welcome the move after months of Hamlet-like deliberations from Fed chair Janet Yellen and her colleagues, as history shows that the S&P 500, on average, loses momentum going into and coming out of the first rate rise of a cycle before gathering itself, providing underlying economic and corporate earnings momentum remain sound.”

Coutts chief investment officer Alan Higgins also says corporate results further underscore a “healthy picture” of the US economy.

He says: “With earnings season now drawing to a close, 74 per cent of the S&P 500 companies that have reported on earnings so far have beat earnings estimates. While this may be partly due to overly gloomy predictions at the start of the year, it still shows an economy in good shape.

“While the US economy is strong, global economic headwinds still remain that the Fed will be conscious of. And given the lack of inflationary pressures, we believe that the pace of tightening will be slow, as indicated by Fed chief Janet Yellen.”