World Week Ahead: US rate decision looms

Monday 14th September 2015

This week’s highly anticipated meeting of US Federal Reserve policy makers has left investors and traders confused about which way to place their bets.

The Federal Open Market Committee begins its two day policy gathering on Wednesday. The next day Fed Chair Janet Yellen will hold a press conference at the end of the meeting, potentially to discuss the first increase in US interest rates in almost a decade.

Since China’s surprise currency devaluation sent equity markets into a tailspin, only stemmed last week, traders downgraded the odds of a Fed rate hike this month. At the end of last week, futures traders assigned a 28 percent chance the rate will be raised a quarter-point; to be sure about half of the 81 analysts surveyed by Bloomberg are predicting an increase this week.

“The market just can’t make up its mind,” Joseph Tanious, an investment strategist at Bessemer Trust in Los Angeles, told Bloomberg. “There is some conflicting information. There is confusion around what the Fed is going to do. There is uncertainty around the future of China and where oil prices are heading. I think investors are having a hard time wrapping their mind around it.”

Last week, shortened to four days by the Labor Day holiday, the Standard & Poor’s 500 Index rose 2.1 percent, the Dow Jones Industrial Average added 0.6 percent, while the Nasdaq Composite increased 0.5 percent.

A rate increase would be good news, Phil Orlando, chief equity strategist at Federated Investors in New York, told Reuters.

"We think the Fed lift-off is a positive for the economy and stocks, because it means the Fed is rubber-stamping the fact they truly believe the economy is strong enough,” Orlando noted.

And in another note of optimism, billionaire Bill Ackman gave his thumbs up for stocks.

"Stocks are pretty cheap," Ackman, founder of Pershing Square Capital Management, told CNBC's "Squawk Box" on Friday.

Even so, there might be more volatility ahead.

“It’s normal to have volatile markets ahead of such an important decision from the Fed,” Ralf Zimmermann, a strategist at Bankhaus Lampe in Munich, told Bloomberg. “It’s been such a long time -- there are a lot of traders who have never seen a rate hike in their career."

US Treasuries also ended the week with a gain, as investors showed a healthy appetite for government debt auctions.

A slew of US economic data scheduled for release in the coming days includes reports on retail sales, Empire State manufacturing survey, industrial production, and business inventories, due Tuesday; consumer price index, and the housing market index, due Wednesday; housing starts, weekly jobless claims, current account, and the Philadelphia Fed business outlook survey, due Thursday; and leading indicators, due Friday.

In Europe, the Stoxx 600 Index fell 0.7 percent last week.

Here, investors will get the latest data on eurozone industrial production, due today; eurozone trade balance, employment, and ZEW economic sentiment, due Tuesday; eurozone consumer price index, due Wednesday; and the eurozone current account, due Friday.

On the commodities front, oil at least can’t seem to catch a break.

Prices slid on Friday after Goldman Sachs warned oil could drop as low as US$20 a barrel because the global glut is larger than it had thought. Goldman Sachs downgraded its 2016 forecast for US crude prices to US$45 a barrel, down from US$57 previously, while cutting its Brent forecast to US$49.50, down from US$62.

Recent hope that OPEC nations could reach an accord with rivals including Russia to pare output has faded.

BusinessDesk.co.nz

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