The U.S. Federal Reserve's rate hike has already produced one clear-cut winner: conventional wisdom. Everyone expected the Fed to tighten and so it did.
The central bank's move was so thoroughly mulled, analyzed and telegraphed well ahead of time that it's safe to assume that stocks, bonds, currencies and commodity prices already reflected most of the move's likely impact even before the announcement was made on Wednesday afternoon.
Rather than wild gyrations, the next few days are likely to see fine-tuning as investors and managers recalibrate their expectations against the cautious language of the Fed statement, in which Janet Yellen and her colleagues took great pains to emphasize the gradual nature of future hikes.
Over the next few weeks, however, there will be winners and losers as the world internalizes the reality that for the first time in nearly a decade, the globe's most powerful central bank feels confident enough to boost rates. Here are some areas likely to feel the impact most strongly.
Winner: The U.S. dollar
Traders note that the greenback declined at the start of previous tightening cycles in 1994, 1999 and 2004, as speculators bet rising rates were already reflected in prices. That may happen again over the next few days. Over the longer haul, however, higher yields in the United States are likely to continue to act as a magnet for funds from abroad and that should lead to sustained strength for the greenback.
Winner: Canadian exporters
A strong U.S. dollar would be good news for Canadian firms that export to the U.S. Canada’s factories that operate in cheaper loonies should be able to use the currency advantage to win new business. The generally positive nature of the Fed statement, which said the recovery is continuing at a “moderate pace,” also bodes well for firms that are counting on healthy demand from the United States.
Winner: Stocks (sort of)
The benign nature of the Fed statement gave an instant boost to U.S. stock indexes. Investors appeared to regard the rate hike as an all-clear signal for the economy. They also liked the Fed’s pledge to take future hikes at a gradual pace. Investors in the financial sector had extra reason to rejoice after the Fed announcement, as U.S. banks such as Wells Fargo and JP Morgan seized on the opportunity to boost prime lending rates.
Loser: U.S. real estate
Higher rates are nearly certain to ripple through to higher mortgage rates. Four out of five economists surveyed by Bloomberg expect 30-year mortgage rates to rise next year, climbing from their current 4-per-cent level to between 4.5 and 5 per cent. Those higher rates are likely to put a brake on the U.S. real estate market, which has had a long and spotty recovery after its excesses of a decade ago.
Loser: Commodities
Rising rates aren’t good for raw material prices. Most commodities are priced in U.S. dollars, so a rise in the greenback means they become more expensive to most buyers around the world. Rising rates, especially in after-inflation terms, are likely to hit particularly hard at gold, which tends to suffer when real interest rates increase, thereby raising the opportunity cost of holding precious metals that have no yield.
Loser: Stocks (sort of)
Rising rates could deliver a wallop to corporate bottom lines, especially in vulnerable sectors. Miners and energy producers are already suffering horrific years, and the turmoil over the past few weeks in the U.S. junk bond market demonstrates growing concern over their creditworthiness. More generally, lacklustre earnings growth and rising rates are not a good combination for stock prices.