INSIGHTS

Alexander Ng

Fri, Dec 21


The US Interest Rate Hikes of 2018 and Beyond

As expected, the Fed hiked rates for the last time of 2018 on Wednesday 19th December after deliberating a unanimous 10-0 decision.  Citing strong labour market and wage gains, the US floating interest rate was hiked by quarter-point from previous floating 2.00%-2.25% to now 2.25%-2.50%.  While maintaining further gradual hikes are still appropriate, the leaning-dovish toned within the latest statement on forward guidance now forecast only 2 hikes in 2019 with continual “monitoring of global economic and financial developments to assess implications for economic outlook”.  US equities market reacted negatively across major US indices, with S&P500 down over -3.7%. 

Through the 4 interest rate hikes of 2018, US inflation rate steadily gained over H1 starting at 2.1% in January.  By March, when the interest rate was first hiked to 1.75%, inflation had already reached 2.4%.  When the Fed hiked rates for the second time of the year in June, the inflation rate had risen sharply to a yearly-high of 2.9%.  US economic growth cooled off through H2 off the back of geopolitical concerns and when Feds raised rates again in September, inflation rate had dropped to 2.3%.  In line with FOMC’s symmetric 2% inflation objective over the medium term, the final quarter-point interest rate hike in December finishes the year with inflation rate at 2.2%. 

S&P500 Daily Chart (Jan-Dec 2018)

Relative to S&P500 movement for 2018, January started very positively, continuing the strong uptrend from 2017.  By the end of January, it had established another record high just below the 2880 level.  Market optimism however was short lived as the first major sell-off at the start of February depleted all early gains of first month.  The index remained volatile throughout Q1, recovering nearly 80% of the initial sell-off prior to the first rate hike in March and settling back down to the February lows by the start of April.  May officially started the steady rally throughout the next 2 quarters for the year.  Just days before the September rate hike, S&P500 established all-time record high reaching 2942.  As concerns of global economic slowdown mounted, the October sell-off dramatically wiped out all gains from the start of the year.  Recoveries were attempted during November, recovering as much as 50% of the sell-off.  However, the final push higher into December was rejected and a week into the final month of 2018, the major US index was pushed back below the negative-gains correction territory.  To wrap up the year, the follow-through from the final interest rate hike of 2018 pushed the S&P500 further down to establish new yearly-low below the 2500 level. 

December, September, June, and March

Let’s review S&P500’s reactions and follow through movements through each of the 4 US interest rate hikes in 2018. 

 

December 19th, 2018

New Interest Rate: floating 2.25%-2.50% (Previous: floating 2.00%-2.25%)
Start of Week Index Price:  2590
Weekly High Index Price:  2601
Within 2hrs from Rate Hike Announcement:  2586 to 2488 (-98 pts; -3.7%)

 


S&P500 H1 Chart (17-20th Dec 2018)

The final hike of the year brought on the strongest initial market rejection, with limited follow through after the initial sell-off.  During the first hour, the market whipsawed 50 points wide nearly reaching 2590 high and dipping below 2540 before closing just below 2560.   An impulsive sell-off found support 70 points lower over the following hour.  At time of publication, market has found lower support just above 2460 level.  This was ranked the 2nd biggest market reaction from the 4 interest rate hikes we’ve seen in 2018.

 

September 26th, 2018

New Interest Rate:  floating 1.75% - 2.00% (Previous: floating 1.50% -1.75%)
Start of week Index Price:  2922
Weekly High Index Price:  2931
Weekly Low Index Price: 2903
Within 2hrs from Rate Hike:  2931 to 2903 (-28 pts; -0.96%)
End of Week Index Price: 2914.00
Total Change for week: (-8.4 pts; -0.29%)

 

S&P500 H1 Chart (24 – 28th September 2018)

As the 3th rate hike of the year was announced, S&P500 tested its daily high above 2931 before closing green on 2928.  The sell-off which followed over the next 2 hours after announcement found S&P500 28 points lower, rejecting just below 2904.  Recovery attempts were made throuhgout the rest of the week, finding the index close at 2914.  A relatively flat FOMC week with the index only -0.29% down since start of week.

 

June 13th, 2018

New Interest Rate:  floating 1.75% - 2.00% (Previous: floating 1.50% -1.75%)
Start of week Index Price:  2780
Weekly High Index Price:  2791.50
Weekly Low Index Price: 2761.80
Within 2hrs from Rate Hike: 2789 to 2775 (-14 pts; -0.65%)
End of Week Index Price: 2779
Total Change for week: (-4.1 pts; -0.02%)

 

S&P500 H1 Chart (11th – 15th Jun 2018)

June’s rate hike was the second one for the year and also the least reactive one on the S&P500, with the index down only -0.02% for the week.  The immediate reaction to the hike was bearish, finding immediate support 12 points down into the close of the US session.  A final push on Friday tested new weekly low at 2761.80 before rebounding back up to 2780 range, a -4.1 points change from start of week. 

 

March 21st, 2018

New Interest Rate: floating 1.50% -1.75% (Previous: floating 1.25% - 1.50%)
Start of week Index Price: 2741
Weekly High Index Price:  2741
Weekly Low Index Price: 2586
Within 2hrs from Rate Hike: 2739 to 2710 (-29 pts; -1.11%)
End of week Index Price:  2586
Total Change for week: (-155 pts; -5.65%)



S&P500 H1 Chart (19th – 23rd March 2018)

The first interest rate hike of 2018 also brought on the most significant response from the S&P500.  Indecisions in the market sentiment to the hike spiked the index up above 2741 over the first hour of the announcement before closing below daily support just above 2710.  While this may have seemed minimal at the time and in hindsight when compared to the near-100 points sell-off within the first 2 hours of the December hike, the trading days following the March hike led to 2-days of consecutive sell-off, finding the index closing -155 points lower, at a loss of 5.65% from start of week. 

Through both the immediate reactions and the follow through market movement after each rate hike, the inverse correlation between interest rates and equities is clearly demonstrated, to various degrees no less.  Simply put, as the cost to borrow money from the Fed raises, a rippled effect causes companies to borrow less, lowering their amount of future cash flows and inherently lowers the prices of company stocks.  Despite the repeated sell-offs across major US equity indices, Fed Chair Jerome Powell maintains gradual rate hikes as the path of forward guidance, forecasting 2 more hikes for 2019.   When questioned if political considerations were factored into the Fed’s policymaking, Powell stated “We’re going to do our jobs the way we’ve always done them…nothing will cause us to deviate from that”.  Where the market may have begun worrying if global slowdown has started impacting the US economy, the final statement of 2018 from the Fed proves confident in their plans forward as we step into the new year. 

Here at Kylin Prime Capital, our dynamic strategic investment portfolio allows us to select specific blend of investment vehicles to profit during both the bull and bear phases of the global economic cycle.  With a view to maximizing diversity of risk, we invest in equities and currencies via CFD’s (Contract for Differences).  These contracts permit us to enter both long and short trades, removing the typical ties to the buy and hold restrictions of the physical equity market.  Therefore, rising and falling markets and stocks hold an equivocal level of opportunity for capital appreciation, as is available when trading in the currency markets.  A trader recognizes each of the above listed market movements presented yet another trade opportunity to maximize gains.  We look forward to capitalizing on much more opportunities in the upcoming year.


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