See Fed hiking rates in Sept, may not impact EMs much: JPM

A: We didn’t expect any clues from the Fed because the news has been slow and we didn’t get any signal. What is interesting though is most of us believed, there is a number of distortions that have slowed gross domestic product (GDP) in the first quarter. The Fed did highlight that which means that many of us expect that we are going to see some rebound from that first quarter.

If that happens then it will just confirm the Fed’s own judgement that there were transitory factors that play here and it means that the jury is still out on when they will move. Many of us think that they will begin to raise interest rates sometime later in the summer, maybe September.

We didn’t learn anything today, we didn’t expect to learn anything because the news has been on the slow side. However, we expect that we are going to see in the next several months rebound from these transitory factors that will bring this debate back to the table.

Q: You expect the first rate hike in September, how do you think global markets including emerging markets will react to that? Will it just be a sentiment knee-jerk reaction on the downside or do you think that this rate hike has the potential to change the course for the market?

A: It does have the potential to take the market aback because the market has pushed out the idea of Fed tightening this year, I think there is only one tightening built in by the end of the year. So, it is not clear to me what market participants, how they view this slow news that we are getting.

However, most economists believe that this is distorted by a number of factors not just weather but the energy adjustments that are going on. They even had a major port slowdown, the goods coming in from Asia have not been able to get into the country because of a port dispute which is now clearing.

This will be a challenge for the market if it turns out that the Fed is right that these are transitory factors that are holding down GDP. If we see decent rebound in second quarter, or third quarter something similar to what we saw last year then the market has to bring back the possibility of tightening which it has really pushed out quite a bit now.

However, in short-term it may be disruptive, in the longer-term the Fed is intending to be very cautious and very gradual and there is no reason for it to be aggressive because inflation is low.

Beyond the initial adjustment to when will the Fed start this process, I don’t think it is going to be that dramatic when they do start the process because I think they have been making quite a bit an effort to try to convince everybody that when they start the process it is going to be very gradual and very slow.

Q: What have you made of commodity prices, we have seen at least crude prices indicate that they have bottomed out. Increasing data out of China is indicating that they are consuming more crude and more of other commodities like iron ore as well. What is your view on the commodity cycle, has it bottomed out even if it is not improving?

A: It may have run its course because it feels as though the market might have gone overboard. When the prices dropped 50 percent, it was quite sudden and prompt. The production side we are seeing some very significant cut backs in activity. So, I wouldn’t be surprised if we bottomed out. It is encouraging things have stabilised.

I am not sure about Chinese demand but it would be encouraging to see Asian demand picking up again, stabilising commodity prices because steel prices and a number of commodities have come down quite a bit and there is a fear that there is just a lot of capacity that has been coming on stream.

With China running slower, the new supply coming on, it wasn’t clear what was going to happen to the commodity prices. However, we are seeing signs that maybe things are beginning to stabilise.