If the strengthened USD, the rally in interest rates, and the underperformance of dividend income stocks aren’t enough evidence, LIBOR is sending a clear signal that a market-based tightening has already occurred. In other words, while the Fed’s explicit tightening has been deferred, interest rates have already risen, resulting in a de facto Fed Funds Rate hike.
Cash & point, 3-month LIBOR has risen +10bps since mid-2014 (from 22.3 to 32.1bps). Perhaps more surprisingly, 12-month LIBOR has spiked +30bps over the ttm period (from 54.1 to 84.5bps)…The significance of that is as follows: whatever loans & credit that are being extended today incorporate these market-based rate hikes; whatever loans & credit that are outstanding also incorporate rising rates. By now, that has filtered through the entire economy, meaning 2015 ytd GDP growth already reflects the headwind of rising rates. Were the Fed to raise its explicit policy rate in December, an overwhelming majority of the fundamental impact has already been administered by the market.