Will US growth spike mean a rate hike?

Today's strong revision to US GDP made the Federal Reserve's job even harder when it reconvenes for September's meeting, which has all but been written off as a source of a rate hike given this week's volatility. 

Source: Bloomberg
  • GDP reading raises chance of September hike
  • Chinese market volatility could lead Western markets lower
  • The understudies take central role at Jackson Hole meeting
  • Total sells off North Sea gas assets

Contradictory statements from Fed members have muddied the picture as much as the data, but the size of today's GDP reading has done enough to revive expectations of a hike in September for just the second time in as many weeks. Fed funds futures have shown an implied probability of 28% that September will see rates move, roughly half that of the December meeting, which has a 53% chance of a rate hike.

A mixture of imported deflation driven by a cheaper yuan, coupled with the global financial markets crash means that traders now expect the traditionally risk averse Fed will choose to hold fire for now and I would agree that a 2015 hike looks as unlikely as ever.

The continued recovery seen in both European and US markets today has given many an increased degree of confidence that we're not simply seeing a dead cat bounce but rather something like a recovery. The FTSE 100 has now regained approximately 40% of the two-week downturn from the 10 August peak. However, with markets currently driven to a large extent by the volatile Chinese market, the worst may not be over quite yet.

This evening's Jackson Hole Symposium will be more about who isn't attending than who is, with Janet Yellen choosing not to be there. Given the proximity to the September meeting and recent events in China, market attention will not wane in her absence, instead putting the focus upon the European Central Bank's Constancio and the Fed's Fischer who are expected to deliver a relatively dovish message to back up yesterday's comments from Peter Praet and William Dudley.

The economic viability of North Sea oil and gas operations came into the spotlight today, with Total dumping $900 million worth of assets in response to the global collapse in commodity prices. It is clear that certain operations and firms will only be able to keep their heads above water for a limited time and thus mergers and acquisitions are likely to become increasingly commonplace as the market consolidates to bring costs down.

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