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Last Updated : Jun 03, 2016 01:55 PM IST | Source: CNBC-TV18

Global markets can digest a rate hike in June-July: S&P Ratings

Paul Sheard of S&P Ratings shares his views with CNBC-TV18 on a rate hike by the US Federal Reserve. He says the Fed is not in the business of surprising markets and the rate hike will be well-received by the markets.

Global markets are on the edge due to rising concerns of an impending rate hike by the US Federal Reserve and the upcoming referendum on Britain’s membership of the European Union. Paul Sheard of S&P Ratings shares his views with CNBC-TV18 on the two events which can impact global markets.

Contrary to the concerns on the US Fed rate hike globally, Sheard said that he expects the next rate hike in June-July period to be fairly well-received by the markets. The economy has improved in the past few years. The Fed is not in the business of surprising markets and the rate hike will be well-discounted by the markets, he said.

A Fed rate hike in June-July and probably in December will be digested easily  by the markets, Sheard he said.

He, however, cautioned about turbulent period in the market due to China’s policy decision. He said the potential growth of China is slowing. He expect China’s growth to be around 6.3 percent this year and about 6.1 percent next year due to huge debtpile it has accumulated in the past few years.

Paul Sheard
Paul Sheard
Chief Global Economist|S&P Ratings Services

Sheard gave a thumbs-up to India’s good governance. He said the country has benefited from it but cautioned that India needs to keep inflation under control. He added that growth will pick up if monsoon is good.

Below is the verbatim transcript of Paul Sheard's interview with Latha Venkatesh on CNBC-TV18.

Q: What are your views on the US Fed rate hike and when it will come?

A: The Fed is buying a bit of optionality still but it\\'s very high likelihood that the next rate hike will be in June or July. It could slip to July but we are still pencilling in June. The economy has improved a lot over the last few years; labour market is continuing to show good signs of tightening. So from the Fed\\'s point of view, it makes a lot of sense to be making gradual cautious adjustments in the Federal funds rates, so we think another one is coming soon.

Q: The one that came in December didn't disrupt the market in December but there was a lot of disruption in January especially as the yuan, the renminbi adjusted to the currencies and we saw some deep depreciation of the renminbi. How would the July or June rate hike be received by global financial markets?

A: I think it will be received fairly well. It is well discounted and certainly by the time it happens, it will be well discounted. The Fed is certainly not in the business of surprising market here. However, January was a bit different; a number of things were happening in January. I think around the Fed, one concern was that the markets were interpreting the Fed\\'s communication as suggesting that it was going to be hiking quite a bit this year; four times according to the dot plot at that time, the summary of projections. I think there was a big gap between the market and the Fed and now that is closed to quite a bit and rate hike in midyear and maybe one towards the end of the year is something that the market could easily digest.

Q: Are you expecting more problems or fears of depreciation of the renminbi in the second half of the year especially following the Fed hike?

A: It could happen and certainly the renminbi has settled down a bit recently. China has not been running down its foreign exchange reserves at the rapid rate that it was in the second half of last year in January. I think seemed to have stabilised a bit, a little bit of attention has come off the renminbi but China is playing a long game here in terms of its financial liberalisation, internationalisation of the renminbi and moving to a more flexible exchange rates. So you should expect from time to time periods of turbulence and periods where the market focuses on Chinese policy makers and maybe questions whether they are fully in control or not.

Q: What is your sense though of the Chinese economy? We have seen a period of stability, we saw even higher fiscal spending, higher metal prices largely because of Chinese buying. Will that continue or what should we estimate in terms of Chinese demand and Chinese economic growth in the second half, July-December?

A: The Chinese policy makers are saying that they want the economic to grow in 6.5-7 percent range. We think that growth will probably be little bit below that. This year we have 6.3 percent, next year we are looking for 6.1 percent. Why is that? We see China struggling with or juggling three balls. One is coping with slower economy; potential growth is China is slowing. Second, having to manage a big debt overhang that built up in the last few years as China pumped up debt to finance infrastructure and housing investment and that is quite a big debt overhang that is sitting on the economy. However, that can be digested but it could also weigh on growth but third and the complicated matter is that China is trying to reform its economy, rebalance its economy and move to a different kind of economic model. Those three balls are difficult to keep in the air all at once. So again some question marks about whether China will be able to successfully manage through all of those challenges without dropping one of those balls from time to time.

Latha: Given that you are looking at the delta in China at least lower even if the number is still big, 6.3. Would you say that the commodity price increase that we saw in the last four months almost 60 percent from the year's lows will be sustainable?

A: Commodity markets will always be somewhat volatile. I think to a large extent the rise in commodity prices particularly oil prices has been self fulfilling, in a way self adjusting. Oil prices hitting very low levels certainly had a big impact on some of the supply coming out of the US shale market in particular. So I do not think this is a turning point in terms of suddenly going back to the days of USD 100 per bbl oil, anything like that is more or natural adjustment as supply and demand come into balance again.

Q: Even USD 50 and USD 70 per bbl make a big difference to the Indian fisc. Which is why I am asking you, approximately, what you would say.

A: In our view USD 50 per bbl is more likely than USD 70 per bbl and the main reason is that if oil prices do start creeping up again back to USD 60-70 per bbl then a lot of the shale supply that has been taken off the market will come back on again. The capital infrastructure that lies behind shale is nimble and it can respond quite quickly to higher oil prices. So a lot of the rigs that have been taken out of production, they are back in play again.

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First Published on Jun 3, 2016 12:22 pm
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