World Week Ahead: Doves vs Hawks

Monday 21st September 2015

After US Federal Reserve policy makers postponed a lift in interest rates, citing concern about volatile global markets, eyes will be focused intensely on speeches by Chair Janet Yellen and her colleagues this week.

Yellen is scheduled to speak at the University of Massachusetts Amherst on Thursday, a week after the Fed decided to keep its benchmark federal funds rate at zero to 0.25 percent.

"It was a close call in my mind, in part reflecting the conflicting signals we’re getting," San Francisco Fed President John Williams said in a speech in Armonk, New York, on Saturday. "The US economy continues to strengthen while global developments pose downside risks to fully achieving our goals."

"I view the next appropriate step as gradually raising interest rates, most likely starting sometime later this year," Williams noted.

St Louis Fed President James Bullard said in a speech in Nashville, Tennessee, on Saturday that he argued against the decision to hold rates steady at the FOMC meeting.

“The Committee wants unemployment at its long-run level and inflation of 2 percent,” Bullard said. “The Committee is about as close to meeting these objectives as it has ever been in the past 50 years.”

"Why do the Committee’s policy settings remain so far from normal when the objectives have essentially been met?” Bullard said. ”The Committee has not, in my view, provided a satisfactory answer to this question."

Richmond Fed President Jeffrey Lacker was the sole FOMC member who last week voted in favour lifting the target rate.

“I dissented because I believe that an increase in our interest rate target is needed, given current economic conditions and the medium-term outlook," Lacker said in a statement released on the Richmond Fed website on Saturday.

Today Atlanta Fed President Dennis Lockhart is set to speak, and again on Tuesday as well as on Wednesday. Kansas City Fed President Esther George is scheduled to hold a talk on Friday.

On Friday, the Standard & Poor’s 500 Index dropped 1.6 percent, the Dow Jones Industrial Average sank 1.7 percent, while the Nasdaq Composite retreated 1.4 percent, as investors worried about the outlook for the world economy.

“Markets are sensing that the Fed is not only worried about the US economy, but also global growth,” Pedro Ricardo Santos, a broker at X-Trade Brokers DM SA in Lisbon, told Bloomberg. “There are very real reasons for concern on this front. Without doubt things have changed.”

Over the past five days, the S&P 500 slipped 0.15 percent, the Dow fell 0.3 percent. The Nasdaq eked out a 0.1 percent gain.

But the Fed’s decision has been a boon for bonds on both sides of the Atlantic.

“We live in a new world in which the global economy cannot generate enough growth to be sustainable without zero interest rates,” David Scammell, a money manager at Santander Asset Management in London, told Bloomberg. “Bonds will be well-supported and the bond vigilantes will have a long wait.”

This week will offer fresh data on the US housing market, with reports on existing home sales released today, the FHFA house price index on Tuesday, and new home sales on Thursday.

"The housing sector has improved further," the Federal Open Market Committee said in its statement at the end of last week's meeting.

This week will also bring reports on Atlanta Fed business inflation expectations, due today; Richmond Fed manufacturing index, due Tuesday; PMI manufacturing (flash), due Wednesday; durable goods orders, weekly jobless claims, Chicago Fed national activity index, and Kansas City Fed manufacturing index, due Thursday; corporate profits, PMI services (flash), and consumer sentiment, due Friday.

In Europe, the Stoxx 600 Index dropped 1.8 percent on Friday, resulting in a 0.3 percent decline for the week.

(BusinessDesk)

BusinessDesk.co.nz

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