Markets prepare for US interest rate increase in June

Major US stock indexes dropped yesterday of the background of a potential US interest rate increase in June.

The Dow Jones Industrial Average plunged lost 0.52% and reached 17435.40 points, the NASDAQ Composite Index lost 0.56% and reached 4712.53 points, the S&P 500 Index lost 0.37% and reached 2040.04 points.

According to the protocol the April meeting of the US Federal Reserve, the members of the Federal Open Market Committee may increase the base interest rate at the next meeting in June if the economic data continues to show positive signs.

These expectations strengthened after yesterday's publication of the labor market statistics. The number of Americans filing for unemployment benefits decreased by 16,000 to 278,000 in the week ended May 14th compared to a 15-month high of 294,000 in the previous period. Claims fell for the first time in four weeks, slightly higher than market expectations of 275,000.

Thus, the net profit per share of the world's largest retail chain Wal-Mart Stores in the first quarter of 2016-2017 fiscal year was $ 0.98 versus $ 1.03 a year earlier. Analysts predicted that this figure will be $ 0.88.

Wal-Mart's revenue in the reporting period grew in annual terms by 0.9% and amounted to $115.904 billion. Experts predicted that this figure will be $ 113.2 billion.

The US Cisco Systems' net profit increased by 18.9% for the first nine months of 2015-2016 reaching $ 7.926 billion, while the company's revenue increased by 0.8% to $ 36.609 billion.

The head of the finance, monetary circulation and credit department at RANEPA, Alexander Khandruev, speaking to Vestnik Kavkaza, noted that "if the rate is not raised, it would mean that the interest rate policy of the Federal Reserve and central banks in industrialized countries is not a monetary and credit regulation instrument. If the rate is raised, it means the yield on securities will decrease. It may lead to new shocks at the stock market. The US Federal Reserve is facing a very difficult problem. On the one hand, they announced that the department will not raise the rate, but nevertheless, they raised it in December 2015, and in April 2016 they did not raise it. They should raise it, as asset price inflation continues and there is an economic bubble in the stock market. Sooner or later this situation needs to be solved," the expert said.

He focused on the fact that the Federal Reserve will raise the rate to a maximum of 0.25% -0.5% at the meeting in June. "I do not think they will raise it even by one percentage point. If the Federal Reserve decides to do so, it will do it step by step. It is associated with the fact that the yield on bonds and the US government debt service ratios will begin to rise. The Federal Reserve created an artificial demand for US government securities. And now it is among the largest holders of government securities. And if the rate is raised to 1.5-2% per annum, the annual debt service would be about $ 800 billion, which is almost $1 trillion," the expert explained.

At the same time, he noted that a possible increase in the interest rate will not affect Russia. "An increase in the interest rate means that the yield on US dollar deposits will be higher, which will create a high demand for dollars. Consequently, the currencies of other countries, such as Japanese yen, the euro, the yuan and others, will weaken. One the one hand, there will be an outflow of capital from those countries. including Russia, in favor of the US dollar. But the devaluation stimulates foreign trade and export. The US current account balance is negative. The US is not interested in the strengthening of the dollar. But an increase in the interest rate will result the higher demand for the US dollar," Alexander Khandruev concluded.