In February last year, AsianInvestor asked and answered 10 questions about key potential developments for the Year of the Monkey, after consulting market experts. Here we look back on our forecasts and assess how good we were at predicting the trials and tribulations of a tumultuous 2016.
Will the US raise interest rates again in 2016?
We started our Year of the Monkey predictions with what seemed at the time a near-certainty. But as we felt at the time and have seen since – with the votes for Brexit and Donald Trump – it was worth at least asking the question, since 'sure things' have a habit of coming unstuck these days.
As we said a year ago, the meeting notes of the Federal Open Market Committee in December 2015 suggested an intention to raise interest rates by up to four times during 2016, at 25 basis points a pop. However, even then the trading patterns of futures on money markets and Treasuries only predicted one or two such increases would take place.
Ultimately the markets proved accurate. The Fed only raised rates once during 2016, on December 14, following a unanimous vote by 10 members of the Federal Open Market Committee. The benchmark rate rose by 25bp to 0.75%. That marked just the second rate increase since 2008 (the previous one was conducted in September 2015).
Yet the coming year could well witness several more hikes. The Fed opted not to raise rates yesterday, but predicts it will hike them three times this year, higher than previous predictions of two 25bp increases.
Chairwoman Janet Yellen (pictured left) has said such rises were seen as necessary at a time when economic growth was picking up, along with the job market, and that inflation could increase to 2%. Consensus economist forecasts believe the US economy could expand by 2% in 2017, with inflation also rising.
The election of Donald Trump as US president could well have an impact here. He has declared his intent to deregulate and cut taxes, as well as potentially introduce a massive new infrastructure investment programme, possibly via tax breaks for corporates. The policies could well lead to more corporate profits and investment, together with consumer spending; a ripe mixture for inflation and thus rate increases.
Will Japan hit Shinzo Abe’s inflation target in 2016?
Our call last year was a relatively safe bet, given that Japan hasn’t yet hit prime minister Shinzo Abe’s 2% inflation goal since he asked the Bank of Japan to target it in January 2013.
In the event the country got nowhere near it. Its average consumer price index (CPI) rate fell by 0.3% for 2016, with the rate dropping 0.2% in December. This took place despite ongoing efforts to bolster inflation, including setting a yield target of zero for 10-year Japanese government bonds in September.
However, 2017 could see a shift in this landscape. For starters, oil prices have rebounded somewhat, which is likely to introduce an element of inflation into the energy-importing country. The yen is also weakening, having dropped from around ¥105 to the dollar in early November to ¥115 as of late January. That will make companies more competitive, potentially raising their earnings.
Will the renminbi continue to weaken against the dollar?
Our cynical take on the value of China’s currency last year was driven by the fact that Beijing seemed to want the renminbi to reflect the country’s economic conditions. And with economic growth slowing from admittedly high levels to 6.9% in 2015, that pointed to a weakening of the yuan.
It turned out to be the right call, helped in no small part by a rebounding dollar valuation towards the end of the year following the election of Donald Trump as US president. The renminbi closed at Rmb6.97 on December 30, a drop of 5.8% from Rmb6.59, where it started the Year of the Monkey. That was a little higher than strategists' predictions, which were in the range of Rmb6.7 to Rmb6.9.
The Chinese government chose to let the currency keep sliding to help out domestic exporters, even as it continued its shift towards domestic consumption and supercharging growth via credit-fuelled infrastructure spending.
However it appears the extended fall of the currency began to worry policymakers and led Beijing to clamp down on capital outflows. Widespread reports emerged in the second half of 2016 that corporates were not being allowed to shift capital from the renminbi to other currencies. The unwillingness of the People's Bank of China to raise interest rates also contributed to continued yuan weakness. The central bank's reluctance to do so is in large part down to its desire to ensure the country's mounting debt (estimated at 277% to GDP as of the end of December) doesn’t become an imminent problem.
Of course, experts have been criticising this buildup of credit for a long time, insisting it could leave the economy in a credit crisis. Thus far China has managed to confound these claims, but its overall debt levels look set to keep rising this year too.