World Week Ahead: China and the Fed

Monday 24th August 2015

The Federal Reserve is preparing for its annual meeting in Jackson Hole amid intensifying concern the slowing growth in China will impact the global economy and US corporate profits.

Wall Street sank last week, along with other equity markets, as did US oil which briefly slid below US$40 a barrel. The declining appeal of stocks and an increased appetite for the perceived safety of the safest of fixed-income securities lifted US Treasuries.

On Wall Street, the Dow Jones Industrial Average slumped 5.8 percent the past five sessions, and so did the Standard & Poor’s 500 Index, while the Nasdaq Composite Index sank 6.8 percent.

Meanwhile, US 10 year notes rose, pushing yields 16 basis points lower last week to 2.04 percent, according to Bloomberg Bond Trader data.

"There's a great deal of nervousness around the weakness in China, and that's overshadowing the fact that the US economy is sound and the European Union economy is firming," Alan Gayle, portfolio manager at RidgeWorth Investments, told Reuters.

In Europe, the Stoxx 600 Index plunged 6.5 percent last week.

Policymakers from around the world will gather in Jackson Hole, Wyoming, on August 27 through August 29 for the Fed's annual conference of central bankers, finance ministers, academics and financial market participants.

While Fed Chair Janet Yellen won’t attend this year, investors and traders will eye comments by other key members of the Fed for fresh clues about the timing of a US interest rate increase.

Minutes of the July Fed meeting, released last Wednesday, lowered expectations US policy makers will lift rates. Investors now see a 34 percent chance the Fed will hike at its September meeting, down from almost 50 percent at the start of the week, futures show, while the probability of an increase at or before the Fed’s December session fell to about 60 percent from 74 percent, futures showed, according to Bloomberg on Friday.

First, Atlanta Fed President Dennis Lockhart will speak today in Berkeley, California.

The latest US economic data will arrive in the form of the Chicago Fed national activity index, due today; the FHFA and the S&P Case-Shiller house price indices, new home sales, consumer confidence, and the Richmond Fed manufacturing index, due Tuesday; durable goods orders, and PMI services, due Wednesday; GDP, weekly jobless claims, corporate profits, pending home sales index, and the Kansas City Fed manufacturing index, due Thursday; and personal income and outlays, and consumer sentiment, due Friday.

While both the Dow and the S&P 500 have given up their gains for 2015, analysts remain optimistic.

Gina Martin Adams, equity strategist at Wells Fargo, told Reuters she estimates the S&P 500 will reach 2,222 over the next 12 months, after commodity prices bottom and earnings improve. The S&P 500 closed at 1,970.89 on Friday.

The outlook for the “Fab Five”—Netflix, Facebook, Apple, Google and Amazon—is also positive, Jonathan Golub of RBC Capital Markets told Bloomberg.

“The one thing they have in common is none of them need a stronger economy to generate their revenues,” Golub said. “They’re companies that are innovating and taking market share and in a slow global growth environment. Those characteristics are the whole market story.”

The latest clues on Europe’s economy in the coming days will come from reports including Germany’s IFO survey, due Tuesday; as well as eurozone confidence, and Germany’s CPI, due Friday.

BusinessDesk.co.nz

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