Fed Is Hiking Rates At A Bad Time

Three things matter for economy to sustain… liquidity, low interest rates and credit growth. There is almost a 100% probability that Fed will hike the rates this week. Liquidity is still abundant as ” A Goldman Sachs index of financial conditions that takes into account credit spreads, equity prices and other market gauges, this month suggested the easiest conditions since early 2015, before the Federal Reserve began lifting rates. Another measure of stress in US money markets fell to near its lowest in seven years, while measures of expected stock market swings have been at the lowest in a decade”.

Global credit growth is where we need to be concerned but first back to memory lane.

The below chart was published by UBS earlier this year where they noted …. back in Jan ’16 the global credit impulse was positive to the tune of 3.8% of global GDP (of which China comprised 3.5% of global GDP) it has now fallen back to -0.1% of global GDP (China’s contribution is -0.3% of global GDP).

But this freshly baked chart from UBS Kapetyn nail it on credit growth front when he writes , the global credit impulse is still falling. And yes, it matters because the correlation of this global credit impulse with global domestic demand is 0.61.”From peak to trough the deceleration in global credit growth is now approaching that during the global financial crisis (-6% of global GDP)

Over the last 6 months, the culprits are the US and China (given large GDP weights) but the size of the declines in, Germany, Italy, and Mexico are notable. And the message from the impulse response functions is basically that global Industrial Production and import volume growth have peaked.

I have also been watching the auto sales numbers and credit card defaults in developed world and it seems consumers are getting tapped . SO, unless govt expands it balancesheet , global economic growth has peaked for this year and FED might be hiking rates at wrong time.