Markets begin to wonder whether a September rate hike could actually happen
- US dollar index rallies 0.8% after Fed’s Yellen and Fischer’s comments
- Aussie dollar loses -0.84% to 0.7554 in the wake of the comments
- Gold manages to close the session unchanged at US$1321.5
- USD/JPY gains +1.33% to 101.87, biggest one-day gain since 12 July
- WTI oil gains +0.17% to US$47.41 after rig count unchanged and attacks on Saudi Arabian oil facilities
- ASX 200 futures are looking to open 13 points lower
- Economic data: 11 am: Australia July HIA New Home Sales
- Earnings: Austal (AX:ASB), Beach Energy (AX:BPT), Estia Health (AX:EHE), Reliance Worldwide (AX:RWC)
So Janet Yellen’s Jackson Hole speech has come and gone, and markets have gained minimal greater clarity on the future path of interest rates. The general takeaway is that a September rate hike is still unlikely, but the Fed would like to see the markets fully pricing in a December rate hike so it can come to pass with minimal fanfare.
The US dollar initially sold off on Yellen’s comments, and it was not until Stanley Fischer reiterated his hawkish comments that the USD really began to move higher. The US dollar index (DXY) gained 0.8% on the day, while benchmark US treasury yields moved higher by 3-7 basis points.
Gold, which normally moves inversely to US rates, closed flat on the session. But big selloffs were seen in the bond proxy-like S&P 500 utilities and telecoms sectors, which lost 2.1% and 1.1%, respectively.
Bond market pricing for a September rate hike has risen to 42%, while December has risen to 64.7%. Markets are still uncertain as to how seriously to take the frequent pronouncements by different Fed members about the possibility of a September rate hike.
This means that after markets price in the reaction to Janet Yellen’s speech at the start of the week, we could see volumes drop off in the lead up to Friday’s non-farm payrolls number. There is certainly a concern that a really stellar NFP report on Friday could actually clear the way for a September rate hike.
However, with all the Fed commentary, markets paid little attention to the slightly weaker final numbers for US 2Q GDP. Or that the first inventories data point for 3Q, wholesale inventories, collapsed to remain unchanged from June to July. Given that inventories were the main drag on 2Q GDP, this should be a bit of a concern for those expecting an imminent September rate hike.
This risk, and its associated upside to the US dollar and US bond yields, is likely to weigh on emerging markets and commodities and their associated assets this week. Many of the biggest winners of the post-Brexit rally that responded well to the collapse in global yields could be set for some near-term difficulties.
Conversely, those parts of the market that suffered the most in this post-Brexit period could be set for some much needed respite. The Bank of Japan will have relished the 1.3% gain in the USD/JPY, its biggest one day increase since 12 July.
This weakness in the Japanese yen looks to set to drive a strong open for the Nikkei. However, the steady ramping up of hawkish rhetoric throughout the Fed’s Jackson Hole meeting looks set to weigh on Asian markets at the open. The ASX looks like it may have a tough day as materials and energy stocks will struggle in the stronger USD environment.