Fed rate-hike risks mount as Vietnamese market braces for volatility

At the Jackson Hole economic symposium last week, Fed chair Warsh struck a tougher tone on inflation, signaling that the U.S. central bank could consider raising interest rates if price pressures fail to ease sufficiently.

The U.S. central bank will ‘have work to do’ if policymakers do not get the confidence they need that inflation is heading down to two percent, he said.

The latest developments at the Fed indicate that global financial markets are entering a new period of heightened volatility, said Nguyen Minh Duc, an analyst at FinSuccess Investment JSC.

One of the Fed’s biggest concerns remains the fact that U.S. inflation has not yet been fully brought under control.

The core personal consumption expenditures (Core PCE) index was unchanged in July, indicating that price pressures remained relatively persistent.

Core goods inflation edged higher, while several components of services inflation continued to show considerable rigidity.

The trimmed PCE inflation measure also rose from 2.26 percent to 2.28 percent, suggesting that demand-driven inflationary pressures have not yet become sufficiently comfortable for the Fed.

However, inflation is not the Fed’s only concern.

Yields on longer-dated U.S. Treasury bonds, particularly 30-year bonds, have remained elevated as investors worry about the U.S. government’s ability to service its debt amid a national debt burden exceeding US$40 trillion.

Higher long-term Treasury yields directly push up mortgage borrowing costs, affecting the broader economy.

This leaves the Fed facing a difficult policy trade-off: raising interest rates could push long-term bond yields even higher and potentially cause a hard landing for the U.S. economy.

According to FinSuccess, the Fed has taken a number of measures in recent months to limit the rise in long-term yields.

Against this backdrop, inflation data itself did not significantly unsettle markets because it had largely matched expectations.

It was Warsh’s remarks that fundamentally altered investors’ expectations.

Data from the FedWatch tool showed that the probability of the Fed keeping rates unchanged at its September meeting fell sharply, from 66 percent to around 40 percent.

Markets have also increased their bets on further rate increases.

What should Vietnamese investors do?  

Nguyen Anh Khoa, director of the analysis and research division at Agribank Securities, told Tuoi Tre (Youth) online newspaper that if the Fed raises interest rates, Vietnam’s stock market could come under pressure through two major channels, including foreign capital flows and the exchange rate.

Higher U.S. interest rates make dollar-denominated assets more attractive, potentially reducing capital flows into emerging markets.

Besides, a stronger U.S. dollar could increase pressure on the Vietnamese dong.

Duc, however, believes relatively high domestic interest rates could continue to support VND/USD exchange-rate stability.

Vietnam still has some policy space on the monetary front, he said, although the State Bank of Vietnam would likely adopt a more cautious approach.

Khoa expects periods of significantly weaker trading liquidity as investors adopt a more defensive stance, particularly around the release of major international economic data.

Such episodes could become more frequent between September and December.

He recommends keeping their stock holdings at a reasonable level while closely monitoring international economic data and, more importantly, the market’s actual response to those developments in Vietnam.

Market corrections could also create opportunities to accumulate stocks with attractive valuations and clear earnings prospects.