Market Nervousness From U.S. Economic Slowdown
MarketPulse | Jan 25, 2016 07:30AM ET
A Federal Open Market Committee (FOMC) rate announcement would usually be the highlight of any week. But this go around, it’s looking to play second fiddle to the Bank of Japan (BoJ). The Fed is expected to stand pat come Wednesday, while the BoJ decision on Friday may announce another round of monetary stimulus. With Japanese inflation non-existent, coupled with a rallying yen (¥118.00) on safe haven flows, Governor Kuroda may have little choice but to ease further.
FOMC
In December, with their credibility on the line, the Fed finally hiked a token +0.25bps. This was soon followed by extreme market turbulence. It’s not entirely the Fed’s fault, but they have contributed. The recent capital market volatility has taken on three distinct phases in a short space of time. First, investor concerns about China’s yuan rate policy (PBoC set the o/n yuan mid-point at ¥6.5557 vs. ¥6.5572- the strongest yuan setting since Jan. 6 and the 11th straight firmer setting relative to close), second, the renewed collapse in crude oil prices (off -40% since mid-Dec.) and finally, the market's concern about the potential slowdown in the U.S. economy.
The first two concerns the market has been dealing with for some time, however the possible slowdown in the U.S. economy (for which the evidence remains relatively mixed - but it’s there) is worrying. A floundering or regressing U.S. should worry everyone. The U.S. economy has to date been the only genuine beacon of hope. Most economists, speculators and investors have tended to agree with Ms. Yellen and company that the U.S. slowdown is but a temporary dip, driven largely by specific drags on the manufacturing sector. However, there is now genuine market nervousness that the U.S. slowdown could be deeper than first thought. The struggles from oil output, foreign demand and the rising strength of the U.S. dollar are proving to be more negative.
Monthly U.S. employment data would suggest that most things are under control. However, the Atlanta Fed’s GDPNow: A Model for GDP “Nowcasting,” which takes full account of the firm growth in domestic employment, would paint a different picture. To date, it's been falling, and now reports that U.S. GDP Q4 2016 growth rate was only +0.7%. This implies that U.S. underlying growth rate in the economy running at about +1.0-1.5%, down from +2.5% eight months ago. Is this slowdown due to temporary factors? If so, then the Fed is justified in what they have been saying and doing to a certain extent. But if not, then the Fed could be backing itself into a tighter corner.
Get The News You Want
For many, the Fed’s December hike was a token - a hike to keep their credibility intact. This week’s announcement comes too soon to admit anything positive or negative. Do not expect them to provide any official comment on the “bear” equity markets – no one wants to admit that “free” money has overinflated stock prices. The world’s reliance on cheap money and ever more central bank interference is putting huge pressure on global central banks and certainly risks setbacks. Nevertheless, do not expect the Fed to draw attention to a possible U.S. slowdown. Why would they, especially with the steady monthly employment numbers? Until there is a consistent slowdown in NFP headline the Fed’s language should always be focusing on “moderate.”
What Can They Say?
Do not be surprised to hear that they are “monitoring developments abroad.” The market consensus is expecting this. Back in September when the odds were in favor of a rate hike they used that exact statement. If they want to send an even stronger message they could take the ECB approach and mention, “that the downside risks to inflation or inflation expectations have increased recently.” In reality, no one seems concerned about this FOMC meet; it’s been viewed as a non-event in which Ms. Yellen is genuinely buying some time to prove that their “temporary blip” belief is correct. Even U.S. money markets are unphased by this meet. Looking at their yield curves they do not expect another Fed hike until H2 and that could even be a stretch.
Original post
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.