The September minutes of the FOMC meeting clearly indicates a rate hike in December, citing the economy’s expansion despite a division on the inflation direction. If it happens, it will be the third rate hike in 2017, falling in line with our view from the beginning of this year for 3 rate hikes. Going forward into 2018, we feel the onus is on the hawks to continue showing their desire to keep raising rates even though inflation keeps falling short of the Fed's target. Right now, we looking at 2 to 3 rate hikes.

We expect the US equities market to remain healthy despite factoring in 2-3 rate hikes in 2018. The reason is that the interest rate movement is from an extreme low base. Rate hikes by the Fed in this case suggest that the economy is doing well and defy the traditional view that a rate hike would not augur well for equities.

But our biggest fear in 2018 is a policy error from the Fed. Since 2016, we have cited the potential risk for an inverted yield curve to emerge sometime in end-2018 or early 2029 due to the Fed’s action, a scenario we would definitely want to avoid as it suggests potential recession. It is one of our black swans for 2018.

• The latest US Fed minuets of the meeting clearly indicates a rate hike in December. If it happens, it will be the third rate hike in 2017, falling in line with our view from the beginning of this year for 3 rate hikes.

• From the minutes of the meeting, the Fed feels that the economy is expanding at a steady clip despite some divisions over where inflation is heading to.

• Nevertheless, it appears that the Fed members are of the view that the factors slowing down inflation will pass. They expect inflation will hit the 2% target. The central bank would start to roll off its US$4.5tril portfolio this month.

• We feel that the onus is on the hawks to continue showing their desire to keep raising rates even though inflation keeps falling short of the Fed's target. Right now, we looking at 2 to 3 rate hikes for 2018.

• In the meantime, the equities have been on a stellar run this year. The three major indexes have reached all-time highs and are all up more than 10% in 2017. Recently, they have been lifted by solid economic data and renewed hopes of tax reform. The stock market could grow further if the tax reforms were accomplished.

• We expect the equities market to remain healthy despite factoring in 2-3 rate hikes in 2018 since the interest rate movement is from an extreme low base. Rate hikes by the Fed in this case suggest the economy is doing well and defy the traditional view that a rate hike would not augur well for equities.

• But our biggest fear after pricing in 2-3 rate hikes is a policy error from the Fed. Our concern since 2016 has been the risk of the Fed policy resulting in an inverted yield curve sometime in end-2018 or early 2029. An inverted yield curve will show that short-term interest rates higher than long-term rates, a scenario we would definitely want to avoid as it suggests potential recession. In fact, this is one of our black swans for 2018.

Source: AmInvest Research - 12 Oct 2017