Who would want to be Janet Yellen this week, seemingly faced with Hobson’s choice? Once again capital markets have reacted sharply to fears of the first rate rise in the US for eight years. Credit market fears this time the catalyst, leading to analogies being drawn with the last crisis in 2007. The shut down of two high yield credit funds in the past week have intensified those fears.
The Federal Reserve has staked all their eggs in one employment basket. For several years they have apparently pinned all monetary policy decisions on the unemployment rate. Simple economics dictates, unemployment falls as the economy grows, wages rise leading to inflation fears as the money works its way back into the economy. The central bank then tightens monetary policy to cool the economy, and eventually one move to many causes the next recession.
Despite improving employment data, retail sales figures have been falling suggesting that the benefits consumers have had are not being spent in the high street, and therefore inflationary pressures are not likely to build much more than they have. The weakness in commodity prices, that seems to have no end, is again another factor that should keep inflation in check.
Japan’s unemployment rate is currently close to 3.5% and still no signs of inflationary pressures in that economy. The Federal Reserve has been tightening monetary policy over the past 18 months. They naturally are keen to take the next step and now move away from zero rates. Perhaps they now regret not clutching the rose in September.
Ahead of the Federal Reserves meeting on Wednesday, November’s inflation data for the US economy is released. A weaker than expected number, may once again muddy the waters.
At a time when gloom and doom appears to surfacing in spades, there was a little ray of sunshine over the weekend. China released its latest industrial production data. Year on year industrial production rose 6.2%, against expectations of 5.6%. Retail sales year on year for November also came in slightly ahead of expectations.
Credit indexes are distinctly lower than where they were in the summer, the S&P 500 despite this weeks fall remains higher, that status quo history suggests will not last. On the brighter note if the high yield market does stabilize post any Fed announcements this week, and the Chinese data continues to beat expectations then equity markets could calm into the year-end.