Markets begin to wonder whether a September rate hike could actually happen

So Janet Yellen’s Jackson Hole speech has come and gone, and markets have gained minimal greater clarity on the future path of rate rises.

Janet Yellen
Source: Bloomberg

The general takeaway is that a September rate hike is still unlikely, but the US Federal Reserve (Fed) would like to see the markets fully pricing in a December rate hike so it can come to pass with minimal fanfare. The US dollar initially sold off on Yellen’s comments and it was not until Stanley Fischer’s further hawkish comments that the USD really began to move higher. The DXY US dollar index gained 0.8% on the day, while benchmark US treasury yields moved higher by 3-7 basis points. Gold, which normally moves inversely to US rates, closed flat on the session. But big selloffs were seen in the bond proxy-like S&P 500 utilities and telecoms sectors, which lost 2.1% and 1.1%, respectively.

DXY
Click to enlarge

Bond market pricing for a September rate hike has risen to 42%, while December has risen to 64.7%. Markets are still uncertain as to how seriously to take the frequent pronouncements by different Fed members about the possibility of a September rate hike. This means that after markets price in the reaction to Janet Yellen’s speech at the start of the week, we could see volumes drop off in the lead up to Friday’s non-farm payrolls (NFP) number. There is certainly a concern that a really stellar NFP report on Friday could actually clear the way for a September rate hike.

However, with all the Fed commentary, markets paid little attention to the slightly weaker final numbers for US 2Q GDP. Or that the first inventories data point for 3Q, wholesale inventories, collapsed to remain unchanged from June to July. Given that inventories were the main drag on 2Q GDP this should be a bit of a concern for those expecting an imminent September rate hike.

This risk, and its associated upside to the US dollar and US bond yields, is likely to weigh on emerging markets and commodities and their associated assets this week. Many of the biggest winners of the post-Brexit rally that responded well to collapse in global yields could be set for some near-term difficulties.

Conversely, those parts of the market that suffered the most in this post-Brexit period could be set for some much needed respite. The Bank of Japan will have relished the 1.3% gain in the USD/JPY, its biggest one day increase since 12 July.

This weakness in the Japanese yen looks to set to drive a strong open for the Nikkei. However, the steady ramping up of hawkish rhetoric throughout the Fed’s Jackson Hole meeting looks set to weigh on Asian markets at the open. The ASX looks like it may have a tough day as materials and energy stocks will struggle in the stronger USD environment.

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