AUSTRALIAN DIARY: Everything you need to know about the week as we count down to the Fed

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Last week was a volatile but mostly positive week for global stock markets as traders become comfortable with the growing consensus that the Fed will not be hiking at next week’s FOMC meeting.

That’s not to say the argument is settled. Far from it. Analysts are more 50:50 than the market’s current pricing of around a 30% chance.

But stock traders managed to push the Dow and S&P 500 up 2% on the week, the Nasdaq gained almost 3%, The Nikkei’s 2.65% rise masked incredible intra-week volatility which included a 7.7% rally and multiple falls of more than 2.5%, while Shanghai’s 1.26% rise masked its own 5.9% fall intra-week.

In Australia the ASX only rose 30 points over the week with the 200 index ending the week at 5,071. Like other markets that gain of just 0.6% masked a 2% gain and then reversal on consecutive days during the week.

It could have been the thrall of the nice weather and an early start to the weekend, but quite possibly the collapse of volumes on the ASX Friday, to around $2.6 billion from the usual $4-$4.5 billion, suggests traders are already getting set for the announcement by the Fed this coming Friday morning at 4am AEST.

So, it could be a long week for markets at home in Australia and around the globe. But low volumes and thin trade are the type of markets that often lead into big events and thin, low volume markets can often lead to whippy and volatile movements.

Locally it’s a very quiet week on the data front with nothing out on Monday. But there could be some focus on data released in China over the weekend. In the year to August retail sales did better than expected with a 10.8% gain against 10.5% which the market forecast. But, industrial output and fixed-asset investment both undershot expectations with a print of 6.1% and 10.9% respectively.

Tuesday in Australia sees the release of new motor vehicle registrations and the RBA minutes at 11.30am AEST. Annette Beacher, TD Securities chief Asia-Pac macro strategist said in her weekly outlook that, “there was nothing new in the Bank’s statement on 1 Sept and we don’t expect anything new in these Minutes either.”

Wednesday we get the Westpac Leading Index of economic growth for Australia. Normally a second or third tier release given the current discussion within the economy on where the economy is headed this will be an important indicator. Writing in his weekly outlook Westpac chief economist Bill Evans said that after July’s weaker result:

The August update could see another lurch lower. It will include weaker updates for most components, with a particularly sharp fall in the ASX 200 (–8.1%mth after choppy moves in July and June). Amongst the other components: the WestpacMI Consumer Expectations Index slipped back 2% after a 7.3% bounce last month; the Westpac Unemployment Expectations Index deteriorated 5.6% after a 2% improvement last month; commodity prices slipped 1% in AUD terms; and the yield spread narrowed nearly 18bps (a weaker growth signal). Total hours worked were flat, while dwelling approvals rebounded 4.2% after a 5.2% fall in Jun.

Markets may not react terribly much to this release but it is an extremely important one nonetheless.

Also Wednesday we get a speech from Guy Debelle, RBA Assistant Governor (Financial Markets) on Bond Market Liquidity, Long Term Rates and China. He’s speaking at the Actuaries Institute in Sydney at 9.30am.

Thursday is quiet with the release of the RBA’s Bulletin the only major event. No doubt with everything going on in the economy at the moment there will be something interesting, but it’s unlikely to be market moving.

Friday is set to be very different though. Australian markets will be reacting to the FOMC’s decision at 4am AEST and then at 9.30am Reserve Bank Governor meets with House of Representatives Standing Committee on Economics in Canberra. The opening statement is likely to be fairly vanilla. But the questions could be very interesting.

S&P 500 4 hour chart (Go Markets, MT4)

Offshore traders will be watching the movements in the S&P 500 which is primed for a big technical move.

That’s important because the market hasn’t priced for a rate hike. Bill Evans said in his note that:

We expect the US Federal Reserve to start raising rates next week (the first time it has instigated a tightening cycle since June 2004). The market is not prepared for this historic event.

We have been forecasting that the FED would start raising rates in September 2015 for around two years. It has been a long wait and, despite market pricing only giving a 30% probability to the hike occurring, we are sticking with the view.

So a move to tighten could shock people. Equally no move could see stocks rally sharply. But most technical traders would expect the current pattern in the S&P 500 to be resolved in the negative. In the lead-up to the FOMC stock traders will be watching this set up and could be a little skittish.

To the data and Monday is fairly quiet with the release of Japanese industrial production, Swiss import prices and retail sales, Italian CPI and EU production.

Tuesday the Bank of Japan has a monetary policy decision, French CPI and then in Britain we get CPI and PPI which will important for the deabte about what the Bank of England is going to do as they edge toward their first tightening. ZEW economic survey is out in Germany along with EU data on employment, trade, and the wider ZEW survey. In the US it’s the vitally important retail sales releease for August which could be important as the FOMC sits down to meet the next day.

Wednesday The BoJ economic survey is out while in the UK it labour force day. In the EU the CPI is out as is US CPI. Retail sales and CPI just before and during the FOMC meeting could influence the decision and so markets will be watching both these data points closely. The NAHB housing index is out along with TIC flows in the US. Traders will be watching the TIC flows to see if the recent Chinese reserve reduction has been accompanied with selling US Treasuries.

Thursday Kiwi traders will be closely watching the release of New Zealand’s GDP. Japanese trade is out, along with foreign investment stats. In Europe the Swiss National Bank releases its interest rate decision and the UK releases retail sales. The US has initial jobless claims, housing starts and building permits and of course, the FOMC decision.

Friday markets will be reacting to the Fed but we also get the BOJ meeting minutes, EU current account and CPI in Canada.

As the week ticks by there will be plenty of political speculation about the future of Tony Abbott’s leadership, depending on the outcome of the Canning by-election in WA to be held on Saturday.

It’s also the countdown to the start of the Rugby World Cup, which kicks off on Saturday with England playing Fiji at Tickenham on Friday night. Australia’s first game is next Wednesday night, also against Fiji.

Here’s Westpac’s full diary of all the key events and data for the week.

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