Richard Turnill
August 16, 2016
Global Chief Investment Strategist

Will the Fed disrupt the EM party?

Stronger U.S. jobs data fueled speculation earlier this month of more Federal Reserve (Fed) rate hikes. Such expectations were overblown. This week’s chart helps explain why.

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BlackRock’s “Yellen Index” (our gauge of 10 key labor market indicators closely followed by the Fed) has picked up, but it’s well below the level before the Fed’s December rate rise, as the chart above shows.

The implications for EMs  —  and investors

Emerging market (EM) assets are typically vulnerable to Fed rate hikes. Higher U.S. rates often buoy the U.S. dollar and weigh on commodity prices. The reaction is likely to be muted at the next rate increase. We expect the Fed to raise rates just once this year — likely in December — and to proceed cautiously given the unevenness of the domestic economic recovery, as highlighted by weak retail sales data released last week, and global growth uncertainties.

The Fed has not signaled a desire to tighten. U.S. jobs data are encouraging. Yet inflationary pressures, while picking up, remain modest. Some evidence suggests the U.S. unemployment rate could fall further without triggering significant inflation. We think the Fed might be willing to let the economy run hot before raising rates. This mirrors developments elsewhere. Bank of England (BoE) Governor Mark Carney last week signaled the BoE may tolerate a period of above-average inflation.

The lower for longer outlook for Fed rates extends investors’ reach for yield, and we see it further supporting EMs. It buys time for EMs to implement structural reforms, such as India’s recent tax reform and Indonesia’s renewed push for fiscal reform. This could enable select EMs to be more resilient when the Fed eventually normalizes rates.

We like EM debt , where spreads remain attractive, and are neutral on EM equities. We prefer domestically oriented stocks and EMs with reform momentum. Read more market insights in my Weekly Commentary .

Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog .

The post Will the Fed disrupt the EM party? appeared first on BlackRock Blog .

Investing involves risks, including possible loss of principal. International investing involves special risks including, but not limited to political risks, currency fluctuations, illiquidity and volatility. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of August 2016 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking" information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. ©2016 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners. USR-10081 http://hvst.co/2biRA5D 
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