Market Watch, Sept. 29

The Fed closes in on a December rate rise as protectionism hits Europe and Oceania.

It's been a quiet week to finish what has been a huge third quarter here in Australia.

However, there were some economic influences in the US, Europe and New Zealand that should be noted.

First off, the increasing global trend of political populism hit two nations that have, in the main, escaped this issue over the past 10 years.

One was Germany, the largest economic player in Europe. Although Chancellor Merkel was voted in for a fourth term, a record in the post-WWII era, the rise of the far right and their demands of nationalism, protectionism and anti-immigration will mean her normally steady economic hand now has a headwind. That's likely to act outside of her decade-long policies and create obstruction in the Bundestag.

New Zealand has had a majority-led government for the past 20 years and a Coalition government for the past 10 years. It now faces a scenario not seen for generations – a minority government that will need to court a nationalist kingmaker with protectionist policies. This will be interesting for a nation that has huge foreign fund flows (especially from China).

Meanwhile, the clarification from Fed Chair Janet Yellen that the Fed's ‘rate rise' pathway is on track means a December rate rise is more than likely on the cards.

The overall strength in the US labour market, wealth and economic growth is allowing the Fed to consider rate rises as a ‘financial stability' mechanism, countering the risk of overheating despite the fact its 2 per cent inflation target has been a constant constraint on moving the Federal funds rate.

The impact from an Australian-centric point of view is the wholesale funding market. Due to the under-liquidity of the Australian market, the wholesale market is a necessity for funding Australian growth.

However, increasing the Federal funds rates means an increasing corporate debt market – something all listed Australian banks are exposed to. Therefore, one should expect further increases in lending rates in 2018 as the private banks are forced to pass through higher lending costs.

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