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Impact of Market Expectations on the U.S. Interest Rate Lift-Off in ASEAN-5 Financial System

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Abstract

During 2015–2016, the market has lowered its expectations on the pace and magnitude of U.S. interest rate lift-off, which should have reduced capital outflow and supported the ASEAN-5 financial markets. Yet, the ASEAN-5 financial markets have recorded mixed fortunes, possibly due to spikes in global risk (proxied by CBOE VIX index). Against the contrasting background of higher global risk and gradual interest rate lift-off, this paper investigates the impact of market expectations on U.S. interest rate on the ASEAN-5 financial markets. This paper concludes that both global risk and market expectations on interest rate lift-off affect the ASEAN-5 financial markets, whereby the negative effect of higher global risk dominates the positive effect of market expectations of gradual interest rate lift-off in the ASEAN-5 currencies and equity markets. However, it is the reverse in the ASEAN-5 sovereign bonds as the positive impact of market expectations of more gradual interest rate lift-off dominates the negative effect of higher global risk.

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Fig. 1

Source: Bloomberg

Fig. 2

Source: Bloomberg

Fig. 3

Source: Bloomberg

Fig. 4

Source: Author’s own sketch

Fig. 5

Source: Bloomberg

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Notes

  1. http://www.bloomberg.com/news/articles/2014-12-17/yellen-doesn-t-see-fed-raising-interest-rates-before-april-1- by Kearns and Condon (2014).

  2. http://www.bloomberg.com/news/articles/2016-01-05/fomc-minutes-guide-from-2016-rate-path-to-inflation-projections  by Smialek (2016).

  3. http://www.bloomberg.com/news/articles/2015-08-19/fed-still-concerned-by-low-inflation-as-rate-liftoff-approaches  by Torres et al. (2015).

  4. http://www.bloomberg.com/news/articles/2015-11-06/payrolls-in-u-s-climb-most-this-year-as-jobless-rate-reaches-5 by Chandra (2015).

  5. Mishra et al. (2014).

  6. http://www.bloomberg.com/news/articles/2015-06-02/the-fed-s-favorite-inflation-gauge-is-helplessly-trailing-the-other-government-measure by Jamrisko (2015).

  7. https://www.bloomberg.com/opinion/articles/2016-01-21/four-fed-rate-increases-in-2016-its-peers-say-no by Gilbert (2016).

  8. Client and Supplier Countries of the EU28 in Merchandise Trade (value%), 2015, excluding intra-EU trade.

  9. Top US Trade Partners.

  10. https://www.bloomberg.com/news/articles/2016-06-29/jakarta-stocks-enter-bull-market-leading-southeast-asia-rebound  by Burgos and Suhartono (2016).

  11. https://www.bloomberg.com/news/articles/2016-05-09/next-job-of-philippines-new-president-is-winning-over-investors  by Karunungan and Sayson (2016).

  12. Fed included International development into its press release since January 28, 2015, FOMC meeting. (FOMC 2015a, b).

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Authors and Affiliations

  1. S. Rajaratnam School of International Studies, Nanyang Technological University, Singapore, Singapore

    Teik-Khim Ooi

  2. Faculty of Economics and Administration, University of Malaya, Kuala Lumpur, Malaysia

    Wee-Yeap Lau

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  1. Teik-Khim Ooi
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  2. Wee-Yeap Lau
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Appendices

Appendix 1

See Table 13.

Table 13 Data description
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Appendix 2

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Table 14 Summary statistics for variables
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Ooi, TK., Lau, WY. Impact of Market Expectations on the U.S. Interest Rate Lift-Off in ASEAN-5 Financial System. Asia-Pac Financ Markets 28, 243–271 (2021). https://doi.org/10.1007/s10690-020-09314-4

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