Well, with November Non-Farm Payroll exceeding expectations at 211,000 jobs, and a revision in October that was higher than the previous; ie 298,000 jobs vs 271,000 prior, it looks set that the Federal Reserve will raise its first interest rate in almost a decade in December.
This is against a background of an ISM Manufacturing Index that fell below 50 in November at 48.6, which is a signal of a contraction, an escalating debt in the US which totaled more than US$58T (government, corporations and households), and a widening trade deficit, due to the continued strength of the US$.
What will be the impact on various sectors of the economy? What about the global economy?
Below are my summation of what could happen in the next few months:
1) US$ Index could go higher amidst QE in EU and Japan, and interest rates easing in many countries in Asia. This could further impact US exports and US trade deficit could grow wider
2) A stronger US$ could impact earnings of multi nationals in terms of US$. This could push the earning of major multinational in the S&P 500 companies into negative growth territory, It seems likely that the S&P 500 could see its earnings recession being extended for the next two quarters as global economy continue to deteriorate. And don't forget, the S&P 500 companies took in more debts than ever for dividends and share buybacks in the last few years. So earnings will be squeezed on both fronts
3) The burden of debt repayment will increase throughout the world, especially for governments and corporations in emerging markets which borrowed in US$. Coupled with the depreciation in the local currencies, many could see their budget stretched. In fact, it is anticipated that China which has US$16T in corporate debts, could face a string of defaults. So far 6 major corporations have failed to meet interest payments on their respective bonds and another 5 have been identified as potentially missing their interest payments in the coming months.
On the US front, the biggest threat would be the default by US shale oil companies which could potentially put US$250B worth of bonds at risk. According to the EIA, some 44 shale oil companies use $0.83 of every US$1.00 they took in to pay off their debt commitments. And herein lies the danger of default as OPEC failed to reach an agreement to lower production in their meeting in Vienna on December 4, which immediately sent oil price further south. Increase in interest rate will only burden these companies as refinancing becomes more expensive and private equity funds shun further investments.
4) REITs which rely on debts to fund acquisitions could find borrowing costs higher and thus impact upon the distributable income to unit holders
5) What of the US government's US$18T? Already tax revenue is falling short of expenditure. Will increase in interest rate result in more borrowings in order to pay off the ever increasing debt level?
In my opinion, despite the assurance by the Federal Reserve, I tend to agree with Citibank's assessment that global recession risks have just increased. This will be followed by a debt crisis of epic proportions which could make the 2008 Financial Crisis seem like child's play.
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