China Rate Shift Raises Fed Move Odds, Nomura Bond Trader Says

  • China cut to curb volatility, encouraging the Fed, Gorman says
  • Gorman's view on liftoff: `I think they're going in December'

China’s interest-rate cut will lead the Federal Reserve to raise borrowing costs in the U.S. this year, according to John Gorman, the head of dollar-denominated debt trading for Asia and the Pacific at Nomura Holdings Inc.

China’s policy shift last week will help curb volatility in its markets, removing an obstacle that kept the Fed from acting at its last meeting in September, Gorman said. The U.S. central bank’s next policy session is Oct. 27-28. Asian stocks rose Monday after China cut both interest rates and lenders’ reserve requirements on Friday.

“It reduces the chance of volatility out of China, which is one of the reasons the Fed didn’t go in September,” Gorman said. “I think they’re going in December.” Nomura is one of the 22 primary dealers that trade directly with the U.S. central bank.

Fed Chair Janet Yellen will have to weigh the effect of the slowing global economy as she decides when to increase the benchmark from near zero, according to her predecessor, Ben S. Bernanke. “The tough decision that she and her colleagues have to make is, is there enough domestic momentum to keep us moving forward despite these drags from abroad,” Bernanke said in an interview that aired Sunday on CNN.

Volatility Reference

The Fed probably won’t act as soon as this week’s meeting, though it may mention reduced volatility in its statement, Gorman said. Policy makers have kept their benchmark rate unchanged since they cut it to a target range of zero to 0.25 percent in 2008 to support the world’s biggest economy during the last recession.

Gorman’s view isn’t shared by everyone. The probability the Fed will increase rates by its December policy meeting is about 36 percent, according to futures data compiled by Bloomberg. The calculations are based on the assumption the effective fed funds rate will average0.375 percent after liftoff.

The MSCI Asia Pacific Index rose for a second day Monday, while the Shanghai Composite Index advanced for a third.The Shanghai index is stabilizing after falling 45 percent from this year’s high June 12 to the low on Aug. 26.

Treasury short-term yields, which are more sensitive to what the Fed does with its benchmark, will probably rise faster than those on longer-term debt, Gorman said.

The difference between five- and 30-year yields is already shrinking, narrowing to 147 basis points as of 8:51 a.m. London time. That’s the smallest gap in three weeks. A basis point is 0.01 percentage point.

Before it's here, it's on the Bloomberg Terminal.