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Minutes to the September FOMC meeting highlighted concerns over the global economic developments, which led policy makers to pause on a rate hike. They decided ‘it was prudent to wait for additional information confirming that the economic outlook had not deteriorated and bolstering members' confidence that inflation would gradually move up toward 2 percent over the medium term’.
Nevertheless, most of the committee members agreed that the US economy had strengthened and labour under-utilisation had diminished. Put differently, heightened growth risks have stayed the hand for policy tightening.
Overall, the minutes confirmed that majority of the FOMC still see a 2015 lift-off on the cards. This also elevated the importance of US data during the inter-meeting period. This week, September data on retail sales, CPI and industrial production will be keenly watched. The Fed Beige Book will also be released mid-week.
In addition, six Fed officials will be speaking, where four are FOMC voters – Governor Brainard, Chicago Fed President Evans, Atlanta Fed President Lockhart, New York Fed President Dudley, St Louis Fed President Bullard and Cleveland Fed President Mester.
Apart from looking for signs of resilience in the US economy, market players are expecting more clarification on the recent falloff in payrolls data. So far, only San Francisco Fed President Williams, an FOMC voter, addressed the recent sub-200k readings on the non-farm payrolls (NFP), saying that an addition of 100,000-150,000 jobs is ‘good enough’ for him. The average number of jobs created in Jan-Sep 2015, fell to 198,000, compared to 238,000 in the same period last year as well as over 200,000 for the first half of 2015.
Europe will be eyeing its inflation data, especially after the ECB minutes showed that the Governing Council generally saw increased downside risks to GDP recovery and inflation, as a result of a stronger euro, weak commodity prices and dimmer growth prospects.
The minutes emphasised that ‘a substantial degree of accommodation was still in the pipeline’, and also stressed that the €1.1 trillion QE programme would be fully implemented until September 2016, and extended beyond if necessary. ZEW reports will also provide a gauge of investor sentiment
In Asia, indicators for China’s economy will be the key focal point this week. September trade figures will also reflect global demand, where the consensus is for a 6% y/y drop in export receipts. While imports are likely to remain in double-digit decline at -15.9% y/y, a narrower trade balance is expected.
In fact, the current account balance of China may stay under pressure for some time, which is in part due to a still relatively strong CNY, which dampens trade competitiveness. Although there are talks that China will keep the yuan stable in its pursuit of inclusion in the Special Drawing Rights (SDR) team, the implementation of a more market-determined CNY fixing, growth concerns and financial reforms are expected to weigh on the local currency.
In the meantime, China may continue to use more of its vast reserves to keep CNY steady, which may add to market volatility.
It is interesting to note that PBOC deputy governor Yi Gang said at the IMF meeting in Lima that a persistent devaluation of the yuan would be inconsistent with China’s economic fundamentals, stressing that the country is committed to make its currency regime more flexible and market-determined.
Is the risk on mood justified?
Interestingly, risk gained some appetite last week, which I feel may be somewhat misplaced. The VIX index fell to the lowest in almost two months at 17.08, which kept global equities buoyant. The S&P 500 advanced 3.3%, the best weekly gain in 2015.
It was even better for European shares. The DAX rebounded 5.7% last week, the largest gain since December 2011. Commodities were also higher, with the Bloomberg Commodity Index heading to a two-month high. WTI crude managed to rose above $50, while gold prices closed above $1150. Despite the delay in the Fed rate hike, the US treasuries remained lower, with 10-year yields unable to close below 2%.
It is difficult to fathom the underlying motivation of the markets. Usually, bad economic data will lead to the unwinding of risks. In these days, the presence of unconventional monetary stimulus, the phenomenon of ‘bad news is good news’ pervades the financial markets. Financial participants expect central banks to bolster the economy via asset purchase programmes if growth risks threaten momentum.
We might still see more risk taking in Asia this week, but judging from the US market performance last Friday, the week is likely to start off on a cautious mood. Meanwhile, Japan is away today for Health-sports Day.
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