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On Friday the major US stock indices were rudely awakened from their summer slumbers. There was a sharp sell-off which followed on from a speech from Boston Federal Reserve President Eric Rosengren. Dr Rosengren is a voting member of the FOMC and renowned for his dovish views. Consequently, investors were taken by surprise when he said that “a failure to continue on a path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.” His comments were seen as boosting the argument in favour of the US central bank raising its key fed funds rate at next week’s meeting.

Yet it’s difficult to see how his speech was any more hawkish than Federal Reserve Chair Janet Yellen’s comments at last month’s Jackson Hole Economic Symposium. Back then Dr Yellen said that the case for an increase in the federal funds rate had strengthened in recent months. Following this, her Vice-Chair at the Fed, Stanley Fischer, said that her speech was entirely consistent with the FOMC hiking rates twice this year, implying a rise in both September and December. The comments led to a modest stock market wobble. But nothing that took any of the major indices out of their summer trading ranges. Not only that, but the downside move was completely reversed a few days later.

So what was it that changed in the two weeks between Jackson Hole and Dr Rosengren’s speech? The answer is the data. In the first fortnight of September we saw the US Manufacturing PMI crash below 50 and Non-Manufacturing expand at its lowest rate in six years. Non-Farm Payrolls came in well below expectations while Average Hourly Earnings slipped back from the previous month. Meanwhile, the Fed’s preferred measure of inflation, Core PCE, is stuck around 1.6% annualised – well below the central bank’s 2% target. Given this string of weak data, investors felt that that the probability of a September hike had declined significantly. Consequently, Eric Rosengren’s hawkish statement unsettled markets.

The sell-off in US stock indices came on strong volume and as volatility spiked higher. This is a worry. However, it didn’t take long for the Fed to take action to stabilise markets once again. Yesterday, FOMC-voting member Lael Brainard stepped forward to urge caution when it came to tightening monetary policy. This helped to reverse some of Friday’s sell-off. However, it may be that the technical damage has already been done as equities are once again coming under selling pressure. The big question now is if stock markets can stabilise ahead of next week’s Fed meeting. One thing is for sure, equity markets really don’t want a rate hike now.

PM Bulletin

David: Yet it’s difficult to see how his speech was any more hawkish than Federal Reserve Chair Janet Yellen’s comments at last month’s Jackson Hole Economic Symposium.

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Posted by David Morrison

Tagged: buletin

Category: PM Bulletin


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