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Stanley Fischer’s comments have given a significant boost to sentiment about the US economy, with the probability of a Fed rate hike in September moving up to 38%.
Fischer believes that the impressive decline of the unemployment rate to 5.3% will stimulate inflationary pressures. He stated, “There is good reason to believe that inflation will move higher as the forces holding inflation down — oil prices and import prices, particularly — dissipate further,” and, "because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2% to begin tightening."
He has been careful to mention that a rate hike in September is by no means off the table, but given recent market turmoil and the need to analyse what the effects of China’s steady devaluation will entail, it seems postponing until December seems the most prudent course. The probability of a rate hike by December now sits at 60.3%.
The optimistic statements about the US economy’s outlook from Jackson Hole may well provide a boost to US equities in Monday’s session.
The release of US ADP employment on Wednesday and non-farm payrolls on Friday will be key in analysing the quantum of a September rate hike.
Australia: RBA and GDP
The Australian capital expenditure (capex) data release last week was quite disappointing. There is steady growing investment in non-mining sectors of the economy, but it is still far from being able to offset mining investment. Nonetheless, the RBA meeting on Tuesday is expected to stay the course, leaving rates on hold at 2% and the statement largely unchanged.
The main uncertainty is whether the recent market turbulence and currency devaluation has influenced the RBA. Continued devaluation of the CNY could lead to much lower global inflation than currently forecast, and any mention of this in the statement would be significant. Unemployment also jumped to 6.3% in the last release, which is higher than the RBA’s forecast for the next 18 months, and any mention of this would be of note.
However, given the stabilisation of markets last week, and the lack of any major changes in the data against the RBA’s forecasts, they are likely to continue with their base case of holding rates at 2% until 2017.
Australia’s Q2 GDP is released on Wednesday, with expectations for it to increase 0.4% quarter-on-quarter and 2.2% year-on-year.
Good GDP data could provide a sentiment boost to the ASX as the index tries to regain its recent losses. The key level for today’s session is 5300, which was rejected on Friday. A close above that level would help support the index’s steady climb.
China: contrasting views on market intervention
This week sees China’s grand WWII commemoration in Beijing. Factories have been shut down, cars have been taken off the roads, and clouds have been ‘seeded’ with a cocktail of chemicals designed to see unbroken ‘blue sky days’ throughout the week. There has been a noticeable soothing of tensions with Japan in recent months, and many analysts are concerned what this big political set piece will mean for regional relations and whether a renewed flare up could affect regional market sentiment.
After the government failed to bail out the market on ‘Black Monday,’ it appeared to be back in the market buying stocks on Thursday. Caixin, a well-respected Chinese media publication, then reported on Friday that the government was raising another RMB 1.4 trillion to add to the market intervention war chest of RMB 3 trillion – now a grand total of RMB 4.4 trillion. At the same time officials seemed to be emphasising that the government would no longer be propping up the market.
The decline seen on ‘Black Monday’ is certainly indicative that the government is no longer supporting the stock market. The intervention on Thursday and the renewed capital raising appears to be a precaution to make sure that the stock markets do not distract from the important political symbols and statements that will be made around the WWII commemoration.
This heavy-handed intervention in the market for motives unrelated to market health is likely to have inauspicious consequences. If market participants know that the government is not propping up the stock market and that the current buying is set to expire this week, then they will undoubtedly be positioning themselves for a sell off as soon as the commemoration period is over. So, as the steel factories start belching smog into the air again, the cars return to the road and the clouds are allowed to condensate on their own accord, then we may also see a renewed decline in the Chinese stock markets.