All eyes on biggest FOMC meeting since January

Inflation risk is starting to creep into the psyche of US markets; the S&P just snapped out of its longest streak of weekly gains in 2014 on Friday, as all eyes turn to this Thursday’s FOMC meeting. 

Source: Bloomberg

US data is now consistently humming; key areas of spending, construction and employment are well ahead of GFC levels and most are either at or ahead of the Fed’s expectations.  

This is causing mass speculation that a language change to the statement is imminent. All commentators and analysts alike are watching what happens to the phrase ‘considerable time’. Expectations are for the removal of these two words, which is likely to signal that the Fed is now on rate hike watch (and I stress watch).

Interestingly, this is not the first time the Fed has used the term ‘considerable time’ in its statements. The ambiguous language is perfect at killing speculation and keeps confidence in the credit market for obvious reasons, as it suggests no move in either direction.

However, as we know form Janet Yellen herself, the timeframe for ‘considerable period’ is ‘six months’, or the more likely interpretation is ‘at least six months’. So, in January 2004 when the FOMC removed ‘considerable period’ from the statement, and added more ambiguous language that included [the FOMC would be] ‘patient in removing policy accommodation’, expectations will be that the post-market trading will transpire again.

At the time bonds, the USD and equities all tightening in the week following the January meeting; it also saw the US ten-year adding 80 basis points and a substantial tightening in fiscal conditions.

This explain why this week’s trading will be so heavily dependent on expectations for Thursday morning as six months after the 2004 January meeting having removed ‘considerable period’ to replace it with ‘patient’ the board hiked rates – watch for interest rate expectations to be upgraded come Friday.

This is why we continue to watch the trading around the USD and the bond markets. Further signs of strength will only heighten the market’s expectations that the September meeting will be the next real change in monetary policy. The US economy is inching closer to standing completely on its own two feet.

Ahead of the Asian open

What is certainly going to drag on Asia today is the data out of China. Over the weekend, industrial production fell to its lowest level since December 2008 at 6.9% versus estimates of 8.8%; retail sales fell to 11.9% versus 12.1% estimated and fixed asset investment is now at 16.5%. This saw the AUD losing 30 pips on Saturday and will feel the pinch as Asia comes online today.

What is even more interesting is that if you look at the Bloomberg tracking index, which collates, industrial production, retail sales, passenger traffic, rail freight, investment and electoral production, it is estimating that China’s Q3 GDP print could be 6.3%. This would spell trouble for China confidence and Asian investment as a whole. Copper futures fell 0.5% on the open this morning and have since fallen a further 0.67% at time of writing. 

We’re currently calling the ASX 200 down 21 points to 5510, however this is based on Saturday’s close and does not taken into account the events from China. The expectations would be for a steeper fall, even with the ASX experiencing six downward prints in the last eight. BHP’s ADR is in the same situation, and despite the fact iron ore held the line and US$82, I would expect it to lead the materials space lower.

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