Temporal Inconsistencies at the Fed: The Fed’s decision to delay the beginning of the normalization of monetary policy of undermines confidence in when lift-off will actually take place.
The US dollar trades narrowly mixed to start what could be a pivotal week. The week has two parts: before and after the FOMC meeting. Before the meeting, we expect broad consolidation, with a modest downside bias in the dollar, as some of the late longs (established after the August 24 frenzied sell-off) shake out by either the loss of momentum or lack of conviction that the Fed will hike this week.
A flood of data comes in the week ahead. The US reports consumer prices, retail sales and industrial output figures. The Eurozone reports industrial production and the final August CPI. Germany releases the ZEW. The UK reports consumer prices, the latest labor market readings and retail sales. Japan reports industrial production and trade figures.
The global capital markets are subdued as the week draws to a close. Asian stocks, while European bourses are heavier. Bonds are firm. The dollar itself is little changed against the major currencies.
The RBNZ cut rates 25 bp to 2.75%. It was already discounted, but what punished the kiwi was the intimation by Wheeler of scope for additional rate cuts. Another cut looks likely by the end of the year. The New Zealand dollar is off by nearly 2%, fully retracing the past two days of gains. Stops thought to lie below $0.6240. There is a large option struck at $0.6300 reportedly expires tomorrow.
Recession. Recession. Recession. In Canada, Belgium, Czech Republic, Italy, Japan, Portugal, Taiwan, Slovenia, the Netherlands, Brazil and Russia. They’ve all either had recent recessions, are in deep danger, or have one now. Who’s next?
Not us. We hope. Australia has dodged the recession bullet for 24 years. But economic pessimists abound, predicting bust anytime soon.
1. China’s reserves fell by almost $94 bln in August. This was a little more than the Bloomberg consensus but not as large as the $200 bln some had suggested. Valuation considerations, often ignored in discussions of Chinese reserves, did not appear to be a key factor in the August decline. The euro and yen rose about 2% against the US dollar in August, which would have flattered reserves, which report in dollars. This would have been mitigated to some extent by the decline of sterling (-1.8% and the Australian dollar -2.7%).
There are three, and arguably interrelated, known unknowns that are seemingly on everyone’s mind. First is the decline in global equity markets. Is this simply a long overdue correction? Wasn’t August 24 some sort of capitulation? Is this a re-test of those extremes, which is not particularly unusual, or is it the start of a new leg down?
The US dollar gained against most of the major currencies last week. A notable exception was the Japanese yen. Steep equity losses and drop in bond yields provided the yen with the customary fillip.
The various economic reports, including the August jobs data and the volatility of the stock market, left Fed expectations unchanged. The September Fed funds futures contract closed at 99.83 (implying a 17 bp effective average Fed funds rate this month). It has closed each of the past three weeks there.
The International Monetary Fund warns that financial turmoil could begin a vicious cycle that hurts global economic growth.
The largest Asian economy’s slowdown, combined with a bear trend in its stock market, could cause lower growth in the future. The IMF warned that China’s weakness is worse than anticipated in a new report, which predicts global growth will decelerate slightly to 3.3%, with China growing 6.8%, a large fall from 7.4% growth in 2014. The report also warned, “downside risks have risen” for the global economy.
