World Week Ahead: Eyes on Fed’s Brainard

Monday 12th September 2016

Investors will scrutinise a speech by US Federal Reserve Governor Lael Brainard today to gauge if the central bank might hike interest rates next week after all.

Today’s speech by Brainard, only announced late last week, follows Friday’s comments by Boston Fed President Eric Rosengren who warned that the central bank might risk overheating the US economy if it waited too long before raising rates again.

“If we want to ensure that we remain at full employment, gradual tightening is likely to be appropriate,” Rosengren said on Friday. “A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.”

His comments revived bets the Fed might lift next week, and Wall Street dropped as a result.

On Friday the Dow Jones Industrial Average shed 2.1 percent, while the Standard & Poor’s 500 Index and the Nasdaq Composite Index each dropped 2.5 percent. Europe’s Stoxx 600 Index retreated 1.1 percent on Friday, bringing its decline for the week to 1.4 percent.

“Dovish Fed members getting called up to bat for a hike is putting people on edge,” Yousef Abbasi, a global market strategist at JonesTrading Institutional Services, told Bloomberg.

The Dow posted a 2.2 percent slide for the week, shortened to four days by the Labor Day holiday on Monday. The US dollar rose on Friday. It gained 0.7 percent to US$1.1233 for the week, according to Bloomberg.

"The main takeaway from all of these comments is that despite slower job growth and weaker manufacturing and service sector activity, US policymakers still believe rates should rise and this consistent message has not been lost on investors," Kathy Lien, managing director of FX Strategy for BK Asset Management in New York, told Reuters.

Brainard’s speech comes as the Federal Open Market Committee, of which both Rosengren and Brainard are voting members, prepares for its next two-day policy meeting on September 20.

Atlanta Fed President Dennis Lockhart and Minneapolis Fed's Neel Kashkari are also scheduled to speak today.

"There are lots of reasons for people to get nervous, particularly with the market at all-time highs," Eric Kuby, chief investment officer at North Star Investment Management in Chicago, told Reuters. “There’s enough negative to tip things over to people taking some profits there.”

The latest economic data will show up in the form of reports on NFIB small business optimism index, due Tuesday; import and export prices, due Wednesday; weekly jobless claims, producer price index, retail sales, the Philadelphia Fed business outlook survey, the Empire State manufacturing survey, and industrial production, due Thursday; and the consumer price index, due Friday.

In Europe, the latest economic data slated for release in the coming days include Germany’s consumer price index, euro-zone employment, and euro-zone ZEW economic sentiment, due Tuesday; euro-zone industrial production, due Wednesday; and the euro-zone trade balance as well as CPI, due Thursday.

Most analysts expect that Bank of England policymakers will stand pat on interest rates and quantitative easing when they gather on Thursday.

Last week the European Central Bank disappointed investors when policymakers did not discuss an extension of its quantitative easing program. German 10-year bunds fell for a second week, pushing yields above zero for the first time since July, according to Bloomberg.

“The economic outlook is not particularly strong and the ECB’s inflation forecast is too optimistic,” Jussi Hiljanen, the head of European macro- and fixed-income research at SEB AB in Stockholm, told Bloomberg. “It was a disappointment for the market that more QE was not announced by the ECB. Having said that, markets will continue to price, or increase the probability, for QE later on.”

(BusinessDesk)

BusinessDesk.co.nz

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