Fed Week is upon us
Finally, ‘Fed Week’ is here and we’ll finally get answers to the questions of if and when the Federal Reserve feels happy enough to raise interest rates for the first time in nearly a decade. As time and luck would have it, should Janet Yellen and the FOMC bring interest rates higher at their meeting on Wednesday, it would coincide with the 8th anniversary of their initial cuts to 0%. There is enough time between now and Wednesday to dive deep into the conversation but for now, markets have a probability of 74% that a 0.25% increase will be seen.
As we have said in the past, it is not so much what is being priced in for this meeting that matters but more so what is coming along the curve. The probability of a rate rise at the Fed’s March meeting currently sits at 32.6% and this measure will be our go-to number for market sentiment on the USD post-Wednesday.
Credit markets continue their wobble
As we head into the last true market week of the year there are a fair few stories that are driving volatility.
Primarily we are watching the movements in wider credit markets following the blow-up of a fund dealing in distressed debt last week. Junk bonds, or debt that has high yields and low credit ratings, have been selling off in the past few weeks as investors try to square up their bets before Wednesday’s Fed decision. A lack of liquidity in this area of investing has only exacerbated these moves.
ZA-rebound
From a currency standpoint, the South African rand has strengthened by over 5% overnight as President Zuma rethought his decision to appoint an unknown civil servant as Finance Minister. David van Rooyen was Finance Minister for 4 days, during which the rand lost around 7%. Over the weekend, Pravin Gordhan who had been Finance Minister up until last year was reappointed.
A rally in South African assets is obviously likely, however, we will need to see further representations from the South African government to make sure that this does not end up as a story of further institutional failure.
China data strong but weekend quiet
Chinese data over the weekend has been decent with retail sales 11.2% higher on the year, beating estimates of an 11.1% rise. A 6.2% gain in industrial production has also taken some of the pressure off Chinese assets although the rally back in regional equities has been very poor.
You wouldn’t know that the data had been positive however, given the performance of the yuan which continues to bump around at 4 year lows. The divergence between onshore and offshore yuan, a notation of liquidity and flows out of China into other asset markets is currently 1.31% – almost as high as the levels seen in the days following August’s devaluation. There is very little standing in the way of a weaker yuan for now.
The day ahead
Although this week is pivotal for data, we will not see it really kick off until tomorrow’s UK inflation announcement. Eurozone industrial production is due at 10am and there are speeches from European Central Bank President Mario Draghi at 11am and from Bank of England Deputy Governor Minouche Shafik at noon.