The market tells you not:
- The past five weeks’ volatility over the impeding Fed meeting
- The ‘outrage’ over the effects of increasing the Feds funds rate will have on emerging markets (EM)
- The threat to US exports to a spiking USD over the increase in rates
- The slowing of global growth and the effect this is already having on US corporates
- The impact of the Chinese yuan devaluation
The list is large. From a market’s point-of-view, there are three main points that really matter which are at least leading the market to price in a ‘no move’ on Thursday morning:
- The market sell-off
- The increase in the spread of corporate borrowing
- USD increases – the US is heading for their third consecutive quarter of corporate concerns about profit erosion on the USD increases. This has been happening since Ben Bernanke started to unwind QE
Which are realistically having a tightening effect on US consumers anyway as the wealth effect is eroded and rates have natural risen through market mechanisms.
Economists, however, are split. Fed speak over the past two weeks has also done nothing, indicating a clear direction with the final word last week being, ‘It will be a close call’.
The facts that really matter for Thursday:
- As far as we can see, labour market conditions are at target levels
- Inflation is clearly not, and look unlikely to reach said target levels even by year-end. This is why the press conference on Thursday and the reasoning behind the decision will be key to how the market behaves heading into December, and the Fed’s view on inflation in general going forward
- The effect of the USD and the impact it’s having on the economy. It’s clearly creating a tightening effect and increased rates should drive it higher. However, history tells you it should actually fall
- EMs, China’s current growth concerns, the high levels of US-denoted debt in EMs and the effect this could have on capital flows is also likely to feature in current thought
This will lead to very light trading and tentative positioning for the next three days. The US markets might have their best week in over seven weeks yet volumes were well below the 30-day average, and that is likely to continue. Commentary and market speculation will likely push traders even further into the side lines making volumes even lighter.
Nothing else will matter this week and for that reason, do not expect major market swings until Thursday morning.
What will be interesting is how the market reacts to the decision itself and the information that goes with it. We will be producing a scenario’s outlook piece this week on the Fed, however there are two I want to highlight in particular:
- Most likely being our view – no move to the Fed’s funds rate, but still signalling a willingness to raise rates in 2015. The likely reaction in our view is a move higher in US markets and the USD likely to see selling
- ‘We see incremental rises as the most prudent measure to moderate the economy’. This has been the wording from Fed members for the past 10 to 12 months. However, the market has not currently priced this scenario in and although its view has been commutated, the market would be caught short and Asia will be among the first to react to the first rate hike post-GFC.
Based on the futures markets from Saturday, we are calling the ASX up 24 points to 5095. The China data from the weekend was very mixed and further speculation around the oil price is a continuing drag. Australia will likely see light trade today.