US Federal Reserve – Rate Rise

OBSERVATION

The December meeting of the US central bank is currently under way and speculation is rife that the Fed Chairman, Janet Yellen, and team will raise interest rates. This is the first time this has occurred since June 2006 (moving from 4.99% to 5.24%) when iPhones were not even in existence and the number one song was about the honesty of Shakira’s hips.

Capture

Graph courtesy Federal Reserve bank of St Louis: https://research.stlouisfed.org/fred2/graph/?g=H2E)

 

ANALYSIS

With this decision coming in the next 24 hours we thought it would be a good opportunity to dive into our data to show what could potentially happen, especially to product groups that are likely to be impacted by a rise in rates.

The following analysis looks at how sales and margin growth (year on year) performance was affected for these product groups in the lead up to the rate rise and then the next few months after the rate rise. Per the following graphs the strong performers are shown in the top right quadrant and poorer performers are in the bottom left.

2 key industries we want to highlight are the automobile and housing sectors as they are likely to feel the effect of a rate hike.

We have chosen July 2004 as the rate hike to analyse as this came just after rates had been held low for some time (similar to our current situation) and was succeeded by a number of rate rises (4 more in 2004, 8 in 2005).

Producers of Motor Vehicles & their engines (US34.1)

USA Consumer Discretionary - Motor Vehicle producers movement since rate rise
CLICK ON THE ABOVE IMAGE TO MAXIMIZE (Blue highlighted sector shows US Producers of Motor Vehicles and their engines - grey dots show other Consumer Discretionary product groups)
Producers of Motor Vehicles and their engines experienced a hit to both sales and margin growth after the rate rises began in July 2004. The current industry has had 7 years of cheap rates since the industry nearly went under during the global financial crisis of ’09. The strong performance of vehicle sales can largely be credited to low interest rates recently and looking at the graph above, a rate hike will likely have a negative effect on auto related industries.
US Residential Construction (US45.21_2)
The strength of the US housing market has waned in our latest readings but still sits positively. Here’s what happened to that market when the Fed began raising rates in 2004 – the blue dot represents our US Residential Construction product group.
USA Consumer Discretionary - Resi Construction movement since rate rise
CLICK ON THE ABOVE IMAGE TO MAXIMIZE (Blue highlighted sector shows US Residential Construction – grey dots show other Consumer Discretionary product groups)
As we can see from the images, there was some pullback on both sales and margin growth after the rate increases began to occur however the market continued to improve in the months after that. The housing market in 2004 was on its way to its peaks of 2005-06 with easy credit along with sub-prime mortgages being key themes here. Whilst sub-prime no longer exists, the easy credit situation at the time did little to deter the rise of the housing market.
Looking at the numbers further we analysed which product groups performed the best over the next 6 months and 12 months after the rate rise. To do this we utilise our QMG score which uses both sales and margin growth as key components. The next 2 tables show best improved sectors over those 6 and 12 month time periods.
6 month:
6m best
12 month:
12m best
In the 6 month table we highlighted Producers of Wood Buildings (US20.9) as it is related to the housing theme shown earlier. Here’s how it looked just prior to the rate rise and then after it occurred.
USA Consumer Discretionary - Wood buildings - movement since rate rise
As can be seen it began to rise after initially falling slightly subsequent to the initial rate increase.

 

ACTION
A rise in rates can have a varying impact on different industries so it is important to look at the coming rise with an eye on the context of each marketplace. We highlight that the rate rise is not likely to affect all industries in the same way, even those that are more interest rate sensitive than others.
This is in full effect with the opposing movements of the housing and automobile product groups we’ve analysed.
Whilst we can certainly use history as a yardstick for just how they might perform there is also more to what affects sector performance than just rate rises. What will be important is if tomorrow’s decision is the first of a bevy of interest rate hikes or if the tap trickles slowly from here on. What is certain is that data like QMG’s can assist our users in understanding what happens to the US economy.
To access QMG’s platform or subscribe to our detailed insights feel free to contact us at insight@qmgi.com

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