With US Fed Chair Janet Yellen delivering a lecture next Friday morning Australian time and the Chinese “flash” PMI out Wednesday the highlights of what is a lighter week for data and events it could be a very interesting five days ahead for traders as they digest the implications for markets and the economy after the Fed passed on raising rates last Thursday.
Ostensibly, that decision was because it was “monitoring developments abroad”. But, the Fed also said “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” Part of the outlook for inflation is influenced by the stronger dollar which Janet Yellen also said had been part of the decision.
There is plenty for traders to worry about in those statement and the irony, of course, is that in naming their fears the Fed shone a light on them.
So, while US traders initially took US stocks higher and sold US dollar down as the Fed decision implied, they quickly rethought the implications of what the Fed had said for the global economic and market outlook and thumped both stocks and the dollar lower in the last hour of trade Thursday and then all through the US session Friday.
The conundrum for the Fed, as the NAB’s Sydney-based currency strategist Emma Lawson highlighted Friday, is that in not hiking rates the Fed might just have unleashed the very forces of volatility it sort to calm. Here’s Lawson on the worry about “developments abroad”:
The thing to note is the circularity of this problem: they don’t hike because EM is under pressure, EM is under pressure because the Fed is going to hike, the Fed doesn’t hike, EM rallies, the Fed turns hawkish again, EM comes off – and so it may go. We need a circuit breaker; hopefully one to the upside, not the downside of the risk spectrum.
Certainly the price action of the S&P 500 on Wednesday and Thursday last week in breaking higher, then reversing, will be worrying some of those who are looking for another break lower in stock prices in the weeks and months ahead.
Worry, hope, and uncertainty are inherent in markets. This week will be no different. That’s particularly so after Japan was downgraded from AA- to A+ last week and France lost its AAA rating on Friday with Moody’s dropping it one notch to Aa2.
Traders on the ASX and of the Aussie dollar which tried twice to break higher Thursday and Friday will be watching offshore developments closely as a lead to local price action.
Looking at the local calender the NAB’s economics team said Friday:
It’s a very light week for the local calendar with only very second tier data, with the ABS Q2 House Prices report (Tuesday), together with the weekly ANZ-Roy Morgan Consumer Sentiment index, the Conference Board’s leading index and skilled vacancies. On Thursday the ABS releases its quarterly population update in Demographic Statistics.
Also on Thursday, the RBA’s Alex Heath, Head of Economic Analysis, is speaking to the Urban Development Institute luncheon in Perth. The UDIA’s web site titles her presentation as “Beyond the Data: Behind the Scenes at the RBA; Discover the Process of Making Nation-Impacting Decisions”, though this sounds more like promotion for the event rather than a specific RBA title.
As for the data, the weekly ANZ-Roy Morgan Consumer Sentiment Index will likely be watched for any bounce that occurs following the change in Prime Minister to Malcolm Turnbull, a bounce usually occurring after leadership changes.
That last point is of course key to the economic outlook for Australia. Contrary to the hand-wringing and doomsday prophecies of many after Australia’s mining investment boom ended the economy has continued to grow. Even though that growth has slowed to just 2% in the year to June 2015 RBA Governor Stevens said Friday that he was pretty impressed with how the economy has gone and how it’s likely to perform in the future.
We negotiated the financial crisis without a major financial crisis of our own or a big downturn in economic activity. We negotiated the first two phases of the resources boom without major inflationary problems, and are part way through our adjustment to the third phase – so far without a major slump in overall economic activity. There is still a pretty good chance that we will come out of this episode fairly well, and much better than we came out of previous episodes of this type.
Which is where Malcolm Turnbull’s early positive approach comes in. His offer to restore business confidence seems contradictory, but it just might work.
Consumer confidence is likely to bounce like the political polls but if Turnbull can boost business confidence to a level consistent with current strong conditions the economy will be on a much stronger footing.
Turning overseas now and the release on Wednesday of the “flash” Chinese, and other, PMIs will be of big interest. In China the market is looking for a slight improvement, from 47.3 to 47.8.
In the US the NAB says that:
There are some further useful updates on the tenor of the US economic growth through the September quarter with Existing and New Home Sales reports for August, Durable goods orders, and the final UoM Consumer Sentiment Index for September out at the end of the week. There’s a reasonable number of Fed speakers back out on the hustings, including a lecture by Fed Chair Yellen at 7.00 am AEST Friday, though will she add much to the debate over rate lift-off timing as she and her Fed colleagues will also be keeping an eye on the data to gauge the economy’s evolving performance.
Elsewhere there are a raft of ECB speakers this week in Europe including ECB President Mario Draghi. We also get any reverberations, such there might be, from the Greek election over the weekend, Flash PMIs Wednesday and German Ifo on Thursday.
In Japan the big event is the CPI on Friday with the “flash” PMI also of note.
Here’s the NAB’s excellent diary of all the key data and evnts for the week ahead.
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