As I mentioned a few days ago, the market is increasing doubting the possibility of a Federal Reserve interest rate rise later on today. You can see it in the way the dollar has sold off in recent sessions, the way gold and oil have rallied and even the equity markets too. Oil has traded above $50 per barrel for the first time in over a week, and this happening on the day of the FOMC should tell you something, similarly the S&P 500 got within a fraction of a point of the psychological 2000 level last night, which would have been the first time since the height of the market turbulence in mid-August. Clearly not only is the market seeing a hike as unlikely they view a hike as unwanted. Perhaps others don’t agree with my thesis that a small hike now would be a declaration of the strength of the US economy, and would lead to a more gentle hiking cycle later!
Over on this side of the pond the data published yesterday only reinforces my view as far as I’m concerned. The labour market data in the UK was very constructive with the unemployment rate falling yet again, down to 5.5%, but even more pertinent was the rise in average earnings to the fastest rate in 6 years. Admittedly the ex-bonus number showed a more steady increase, but when you add bonus’ we get a number which was 0.4% better than forecast, and a solid increase over the prior period. Now most of the time it pays to look at the ex-bonus number, but it’s worth pointing out that if bonus’ are better than expected that’s valuable information in its own right! My main point though is that the UK and US are together at the vanguard of the post-GFC recovery, despite recent concerns both of these economies remain in a very strong position and should really be considering tighter monetary policy at this point in the cycle.
The OECD has cut its global growth forecast on the back of poor Chinese data and recent market volatility. When you consider that there are increasingly public doubts about the veracity of Chinese GDP growth data – with some thinking that the East Asian giant is probably not even growing faster than 5% annualised GDP in reality (rather than the official 7%), you can imagine that even the OECD’s re-estimation of global growth might be on the high side. The OECD has clearly joined the ranks which includes the IMF and the CEO of Goldman Sachs, Lloyd Blankfein, who are seeking to discourage the Federal Reserve from hiking rates tonight.
The bottom line is the market will most likely have its way tonight. It wouldn’t shock me if the FOMC tells us that rate hikes won’t happen until next year. If that happens we might get a brief dollar sell off, but at some point the worm will turn, and I’m guessing sooner than most expect. The dollar will quickly start to recover and will rally strongly, because this is the paradigm we are in – positive risk sentiment equals rising equities and a stronger dollar. But there is fundamental support for a dollar rally in a ‘no Fed hike’ scenario: the likelihood of the US central bank falling behind the curve will be that much greater if the Fed doesn’t hike now, and a more aggressive hiking cycle later could drive the greenback to fresh highs.
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