After a roller coaster week, wild swings in almost all asset classes all over the world, voices of the sceptics started to rise “2008 financial crisis is back”. The week started with a Black Chinese Monday, equities dropped 8.5% and reverberated around the globe. 1,000 point from the Dow Jones industrial average vanishing in first minute of trading, oil at levels last seen in 2009. USDJPY falling more than 500 pips from its highs and VIX spiked 90% to levels last seen in the financial crisis… It looked so much like 2008.
The dramatic selloff was driven by concerns over slowing Chinese economy, which led the PBOC to devalue the Yuan in response to slowing exports and manufacturing figures. These worries went well beyond China’s equity markets and investors looking towards next Fed meeting scheduled on 16th and 17th Sep for signals on whether the U.S. economy can tolerate a rate hike.
Fed’s Bill Dudley argued last week against reading too much into market fears but also made a statement that September lift-off has become less compelling (a new fed term) meanwhile his colleague Jim Bullard, president of the Reserve Bank of St Louis seemed keen to look through the recent global markets shakeout on the path towards raising interest rates. On Fridays Jackson Hole, Wyoming summit Stanley Fischer, vice Fed chair indicated he has yet to make up his mind whether to vote on Septembers meeting for the first rate hike. These different opinions clearly signal that the Fed is not completely confident about hiking rates although with healthier economic U.S. data than many has expected. U.S. second quarter GDP revised higher to 3.7% versus a first reading of 2.3%, businesses in July spend much more than expected with durable goods orders rising 2% vs expectations of 0.4% decline. Consumer wages and spending looks healthy…
The remaining key events leading to the September Fed Meeting
- Nonfarm Payrolls. Sep 4
- Retail Sales. Sep 15
- CPI Sep 16
Clearly, the most important indicator of the three is U.S. non-farms payroll with economists looking for 220,000 addition in jobs in Aug. Any print above 250,000 will provide a stronger signal for Fed hiking in 2015. The debate for the next couple of days is most likely to be Sep or Dec for first-rate hike in 9 years.
While volatility in financial markets is likely to delay a move, the fed can still lift rates in September and pull the dots lower “expectations of future rate hike” in the dot chart making it a zero sum game! Meaning the Fed officials are confident that the U.S. economy on the right track “we have to normalize monetary policy” but no need to panic as the trajectory for future hikes will be slower.