2015 ended with the Federal Reserve (Fed) raising rates for the first time in nearly a decade, a move which intended to signal the end of the so-called “lower zero bound era”.
My belief is that the US rate hike came too early. True. The economy is expanding; however, inflation is still significantly below the 2% target. Additionally, the remaining US macroeconomic indicators have behaved quite erratically over the past year.
Maybe I am turning into a younger version Dr. Doom – American economist Nouriel Roubini – but I am not optimist at all for 2016.
If things turn nasty, then Fed Governor Janet Yellen may indeed be forced to roll back the rate increase just like former Ecb governor Trichet did in 2011 when he mistakenly thought that a hike would have sustained economic growth.
Here are three patterns to watch out for.
THE CHINESE ECONOMY CONTINUES TO SLOW DOWN. If China slows down, the US economy will slow down and play a knock-on impact on the World Economy. With the eurozone growth being already fragile, it would take very little to wipe out any (small) progress.
A BANKING CRISIS ERUPTS IN THE EUROZONE.
2016 could expose some weaknesses in the European banking sector as higher Basel III capital and liquidity requirements continue to be implemented. Watch-out for the Italian regional and cooperative banks. They are under pressure and could crack like German landesbanks did few years ago.
RUSSIA, MIDDLE EAST AND COMMODITIES. The third element to be wary of arises from geopolitical uncertainties. Brent oil, historically a geopolitical thermometer, and other energy commodities are currently (and many believe ‘artificially’) kept low.
Many countries that rely massively on natural resources could begin to struggle and implode if commodity prices do not return to mid-2014 levels. I am not a meteorologist. However I can see storm clouds gathering. Can’t you?