Global markets witnessed heavy selling on Friday as comments from different Federal Reserve governors sent mixed messages around the likelihood of future rate increases. Comments by Boston President Eric Rosengren who is a voting member this year and has historically been a dovish policy maker stated that there are “longer-term risks from significantly overshooting the U.S. economy’s growth” and that a “gradual tightening is appropriate”. At the same time while stressing that rate increases will not be too rapid he noted “a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy”.
At the same time comments from Federal Reserve Governor Daniel Tarullo suggested a more dovish case when speaking with CNBC that he was waiting to see more evidence of a sustained uptick in inflation before raising rates commenting that there had been “so many false ups and downs in the past”. Finally Dallas Fed President Robert Kaplan who does not vote on policy this year highlighted that “the Fed can afford to be patient and deliberate in its actions” and that the path of rate hikes is likely to be “much flatter than we’ve ever experienced historically”.
While Rosengren did not comment around the likely timing of the next hike the market interpreted his comments as rather hawkish, especially coming from one who has traditionally been quite dovish. The reaction across markets was swift, with all ten sectors of the S&P 500 index finishing lower led by losses in Utilities (-3.75%), Basic Materials (-3.22%) and Telecommunications (-3.20%). Meanwhile even Financials which would benefit from an interest rate hike also declined -1.88% in what seemed to be a broad based sell off.
The U.S. dollar index gained +0.33% while the S&P500 & Nasdaq 100 both declined -2.45% & -2.50% as the yield on two year government bonds increased 1.2 basis points to 0.79% as did the yield on ten year securities, up 5.5 basis points to 1.671%. The first chart below highlights the decline in the S&P500 along with a spike in the VIX, following extremely low readings which represent levels of complacency in the market.
The likelihood of a hike at the September 20-21st meeting is currently priced around 23.4% according to data collected by Thomson Reuters. As I’ve repeated many times previously I do not believe September would make sense to hike rates with December being a very real possibility if we continue to see improving data. The recent data out of the U.S. is OK but not strong enough to suggest the need for urgent action by the FOMC, logically it makes sense to err on the side of caution and similar to just before the December hike in 2015 we are likely to see all FOMC members coming out in support of a rate hike. However judging by the markets reaction we certainly cannot go into the September ruling out a hike.
European equity markets were also broadly lower, led by losses in the Euro Stoxx 600 (-1.09%) and DAX -0.95% as the Euro fell -0.36% against the U.S. dollar. Data out of the U.K. showed that the trade deficit slightly larger than expected to £4.5 billion with expectations of £4.2 billion. The FTSE100 declined -1.19% despite a -0.23% drop in the Pound which usually has a net benefit to the index given the large overseas earnings exposure of those constituents.
The Hang Seng gained +0.75% while the CSI300 declined -0.64% as Chinese CPI increased less than expected, up 1.3% year-on-year for August with estimates for a 1.7% gain. Meanwhile producer prices for the same period were slightly better than forecast decreasing only -0.8% with estimates for a -0.9% decline and -1.7% prior.
Oil prices finished significantly weaker on Friday as the larger than expected crude inventory draw from last week is seen as more of a one off event and the U.S. dollar strengthened with WTI & Brent crude oil declining -3.65% & -3.96% respectively with the second chart below showing a steady decline on Friday. Other commodity prices were also broadly weaker with the Thomson Reuters CRB index down -1.67% as was natural gas -0.32%, copper -0.36%, spot gold -0.77% and spot silver -2.86%.
Locally the S&P/ASX 200 finished -0.86% weaker and the market is set to open lower again this morning with ASX SPI200 futures down a further 79 points.