Based on last week’s Federal Open Market Committee (FOMC) minutes, it seems the Fed’s decision to hold off on raising interest rates at its September meeting was not a close call.
The minutes showed that the FOMC was hesitant to pull the trigger, as members remain worried about global growth risks. While most of the officials thought it was still a good idea to wait, however, consensus seems to be that stronger economic data will continue to make a clear case for a lift-off this year. But this came off the back of a highly disappointing US jobs report the week prior – which instigated an equity rally based on the belief that the Fed would hold off. For the time being, interest rate futures are pricing in a first US rate hike in May 2016.
But what could change the outlook? In the US, watch for September retail sales tomorrow, followed by the Michigan consumer sentiment and industrial production reading on Friday. In the UK, meanwhile, where interest rate futures are pricing in the first UK rate hike in December 2016, keep an eye on today’s inflation data, followed by labour market data on Wednesday. Europe’s largest economy, Germany, also presents inflation data today, alongside the ZEW economic sentiment reading.
But more and more analysts are arguing that the central banks need to stop focusing on inflation as a reason to keep cutting rates and/or introduce more stimulus. Teis Knuthsen, chief investment officer at Saxo Private Bank, thinks central banks are wrong in their inflation analysis. He told me that monetary policy can’t be expected to contribute to a rise in inflation, as disinflation and deflation are primarily being driven by changes on the economy’s supply side – such as falling oil prices and a shift to a digital economy.
Knuthsen believes that, as long as the Fed is holding on interest rates, it is likely the European Central Bank will try to prevent a rise in the euro. He sees the dollar rising over the next few years, taking euro-dollar below parity. But, he says, “without the Fed in the driving seat, it would be a surprise if euro-dollar corrects meaningfully higher (perhaps $1.25).”
US CORPORATE EARNINGS
With this week seeing the official start of the US earnings season, focus may be more driven by corporates. Today sees JP Morgan Chase kick off third quarter results along with Johnson & Johnson and Intel.
More earnings will come out of Wall Street tomorrow, with Bank of America, Wells Fargo and BlackRock all on the list during the trading session, while Netflix reports after the bell. There’ll be more banking results on Thursday, when we get numbers out of Goldman Sachs and Citigroup. UnitedHealth and Philip Morris are also on the agenda that day. Finally, on Friday, we round off the week with General Electric and Honeywell.