Below trend growth to continue
Things aren’t really getting better. The circular theme of markets continues, with equities weakening, weighing on broader risk, weighing on currencies, weighing on equities. And so it goes. While the Fed waits to decide to raise rates, this is not helping the global markets.
Things aren’t really getting better. The circular theme of markets continues, with equities weakening, weighing on broader risk, weighing on currencies, weighing on equities. And so it goes. While the Fed waits to decide to raise rates, this is not helping the global markets. Add the increased supply of many commodities, and the commodity complex weakens, adding to equity weakness.
We saw that circularity in the overnight session, with yesterday’s down day in Chinese equities being followed by 2.5-3% declines in European and US stocks. Oil failed to hold its gains of the day before and then some and the USD was against weaker against the majors, but stronger against EM. The AUD was the underperformer.
There was surprisingly little movement in the bond market. The reason for this is a little murky but there are conflicting forces at play. While none can be wholeheartedly proven just yet it could be the case that: growth rates are yet to be proven to be weaker but the concerns are driving down yields. This is balanced against the idea that global reserve managers are selling bonds and driving up yields. It might be a question of time needed to make this clearer or see which force is the over-riding factor.
The outlook for the Fed inched back towards the “no” hike again last night, with the US ISM coming in relatively weak. It was the softest read since May 2013 and driven by new orders, export orders in particular. While the Fed speakers at Jackson Hole were pretty relaxed about global volatility, they may not be able to fully ignore this indicator of health in the US economy. The series for production, inventories and employment also declined.
The Fed’s Rosengren (2016 voter, dove) is looking for a more modest tightening cycle and the long term fed funds rate will be lower than in previous cycles. He did, in Q&A, acknowledge the risks from the current period of market volatility.
Today’s data may have suited Rosengren’s view of the world, but not everyone’s. There has been a lot invested in the Fed’s move off the zero interest rate bound and it appears that the window of opportunity is getting smaller and smaller. It isn’t that the US economy might not be ready, and the labour market report at the end of the week will add to that debate, but can the rest of the world?
In a world of global interconnectedness, in financial markets as much as anything else, this decision from the Fed shows how difficult it may be for even the biggest and most open economies to pursue independent monetary policy.
The present global market ructions also show how much the policy path since 2008 have encouraged that interconnectedness.
That makes deciphering expected market behaviour even more difficult than it usually is. And generates more volatility. The path ahead is definitely not going to be a straight line; for the Fed or for assets.
China’s official PMI came in lower on the month, as expected, yesterday; so showing a decline but nothing worse than expected. The equity markets remained under pressure. There was a new policy announcement to impose a 20% reserve requirement on USD/CNY forwards. This didn’t add positively to sentiment.
The RBA kept policy unchanged yesterday and while there were some changes to the statement we were left with the impression that they are in no hurry to cut interest rates. So we are left monitoring global events and volatility. And the RBA joins the host of G10 central banks in the last week who have expressed their relatively measured commentary regarding the volatility.
Australia releases its GDP for Q2 today. This can often have an outsized market impact for a backward looking report. The market is looking for 0.4%qoq, NAB is at 0.5%. Given the external volatility, any AUD reaction is likely to be biased to the prevailing market mood.
We have a range of US data, but none really first tier: ADP employment, factory orders and the beige book.
On global stock markets, the S&P 500 was -3.00%. Bond markets saw US 10-years -6.02bp to 2.16%. On commodity markets, Brent crude oil -9.31% to $49.11, gold+0.6% to $1,139, iron ore +0.7% to $56.59. AUD is at 0.702 and the range was 0.7016 to 0.7154.
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