Markets look forward to Fed minutes

After all the brouhaha this week, it is likely that the attention on PBOC’s yuan devaluation would switch to the Fed minutes in the coming week.

Federal Reserve
Source: Bloomberg

After all, the dollar play is kept very much alive on expectations that the US central bank will raise interest rate this year.

This would shift the market’s focus to what the FOMC members said at the 28-29 July meeting.

The biggest takeaway from the July meeting was that Fed officials will pay extra attention to employment data.

Much of the spotlight on the post-decision statement was focused on how the Fed viewed the job markets.

The policymakers added the word ‘some’ in describing how much improvements they would like to see in employment sphere, and this has captured the mind of market participants.

Many analysts interpreted this as a downgrade in criteria for employment progress. Consequently, the market kept a close eye on the couple of nonfarm payroll reports ahead of the September meeting, judging that a good run of results could seal the deal for Fed tightening.

While the US central bank was relatively upbeat in their economic assessment and outlook, the Fed officials also moderated overly optimistic expectations by pointing out that fixed investment and exports remained on the weak side.

What ought to be taken note of is that committee members may be somewhat worried about a regression in inflation, particularly due to recent commodity price falls. Specifically, the FOMC omitted a sentence, in the June report, saying that ‘the transitory effects of earlier declines in energy and import prices’ are fading. The risk of fresh deflationary pressures arising from China’s devaluation of its currency could be an additional worry to the US inflation outlook. However, the market is now sanguine about any negative impact, trusting that the trajectory of the yuan is not southward.

That said, apart from sustained improvements in employment, the Fed would want to be reasonably confident that inflation is on the path towards reaching its 2% target before giving the ‘go’ signal. The persistent weakness in commodity prices would continue to undermine that scenario.

Therefore, investors should clearly be looking at the language surrounding the Fed’s view on prices. This would afford them a peek at the timing of the rate lift-off. Nevertheless, considerably strong employment gains could still keep the Fed on track to raise interest rates before the end of this year, be it in September, December, or even both. The credibility of the Fed depends on it.

Meanwhile, a bunch of other US data will also be released next week, with some interest to be paid on housing data, inflation reading, and jobless claims. Greece would need to repay a 3.2 billion to the ECB by 20 August, although recent ECB minutes revealed that the embattled country is unlikely to be a concern for the wider region.

In Asia, Japan Q2 GDP is due on Monday, with economists looking at a contraction of 1.8%. China would announce its reading on property prices for July on Tuesday. Bank Indonesia will meet on 18 August, where the consensus is expecting an unchanged policy decision.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.