If anyone harboured thoughts that global markets weren’t completely in the thrall of the ‘could they, would they?’ debate about the Fed’s 2016 intentions, they were disabused of the notion from the US get-go on Friday. Boston Fed President Eric Rosengren sent risk markets into a tail-spin at a breakfast presentation in Massachusetts, saying he backed gradual interest rate hikes and that waiting too long meant risks some asset markets like commercial real estate “become too ebullient.”

“My personal view, based on data that we have received to date, is that a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy,” Rosengren said. “If we want to ensure that we remain at full employment, gradual tightening is likely to be appropriate,” he said. “A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.”

Rosengren’s comments were nothing new compared to remarks he’d made last month, but the fact they were repeated after the intervening US data run (two weak ISM surveys and a so-so August employment report) marked them out as significant. We can now count Rosengren as a likely dissenter, alongside Esther George and Loretta Mester, should the FOMC decide to stand pat on 21 September.

Market reaction to Rosengren’s comments was significant, but markets were later ‘thrown into a loop’, as CNBC put it, over news that the central bank’s most dovish official, Governor Lael Brainard, will be delivering a previously unannounced speech Monday at The Chicago Council on Global Affairs. Brainard’s planned speech was in fact already known on Thursday. But markets being markets were quick to make two and two equal twenty two and determine that Brainard was set to depart from her previously uber-dovish script and give a hint that a September rate hike was ‘on’.

In contrast to Rosengren, Fed Governor Daniel Tarullo described himself as being a member of the “show me” camp at the Fed, wanting to see “more tangible evidence of inflation” before raising rates. His message was ignored.

As for markets, US stocks crunched, the S&P500 -2.45% to 2127.8, the Dow -2.1% and the NASDAQ -2.5%. The VIX jumped by 5 points to 17.5.  In rates, if you looked at the front end of the US curve, you’d be forgiven for wondering what all the fuss was about (though in truth, the feedback loop from sharply falling stocks to short duration government bonds is alive and kicking).  OIS pricing for the probability of a 21 Sep Fed hike moved from 27% to just 29% and December from 70% to 72%. The 2-year note yield ended up just 1.2bps to 0.784%, 10s by 7.6bps to 1.676%.

In FX, the US dollar rallied hard, most notably against commodity/’risk’ currencies. AUD/USD was the biggest loser, -1.33% to 0.7541 (having ended the APAC session near 0.7650) followed by NZD (-1.01% to 0.7324). USD/JPY rose the least amongst G10 pairs, +0.2% to Y102.69. In index terms, the narrow DXY gained 0.38% to 95.35, the broader BBDXY by 0.5% while the ADXY finished NY -0.5%.

Commodities fell across the board in conjunction with a stronger dollar. For details see the table on p2 of the pdf.

Coming Up

We’re entering pre-FOMC week (21 Sep) with Fed officials going into pre-meeting purdah after today. Fed Governor Lael Brainard speaks tonight/early Tuesday morning our time and is the last scheduled speaker before the lock-down starts. Brainard has marked herself out as a dove with particular sensitivity towards the level of the dollar as a constraint of the need to lift interest rates. This should be a very market sensitive speech, in particular if she displays any sign of support for a September rate rise.  Atlanta Fed President Dennis Lockhart speaks tonight, as does Minneapolis Fed president Neel Kashkari.

The key US numbers due this week are for retail sales (Thursday), CPI (Friday) as well as the University of Michigan’s preliminary September consumer sentiment index (also Friday).

Elsewhere offshore, the keys things to note will likely be the usual batch of China activity data – for August – covering retail sales, industrial production and fixed asset investment, all on Tuesday. On Thursday we get New Zealand’s Q2 GDP estimate, where our BNZ colleagues’ look for a very strong 1.2% Q/Q print (consensus 1.1%).

Locally, the two main points of interest should be Tuesday’s NAB business survey and on Thursday, the August Labour Force survey where NAB forecasts a 22k rise in employment and unchanged 5.7% unemployment rate. RBA assistant Governor Chris Kent speaks on Tuesday at a Bloomberg breakfast event, and assistant governor (soon to be deputy Governor) Guy Debelle at an FX conference on Wednesday.

Overnight

On global stock markets, the S&P 500 was -2.67%. Bond markets saw US 10-years +7.59bp to 1.67%. In commodities, Brent crude oil -1.38% to $47.88, gold-1.3% to $1,327, iron ore -1.2% to $57.78. AUD is at 0.7539 and the range since Friday 5pm Sydney time is 0.7539 to 0.7641.

For full analysis, download report:

•  Markets Today:  13 September 2016 (PDF, 90kb)

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets

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