The lack of volatility that money managers have enjoyed over the summer months, ended with a sharp correction in global markets on Friday. The FTSE 100 fell over 1%, the S&P 500 1.4%, while the World All Share Index fell 1.5%. The Vix index rose 40%, closing the week at 17, the highest level since early July. Central Bankers of Europe and the US taking the brunt of the blame. On Thursday, Mario Draghi’s lack of clarity at the monthly ECB meeting followed by the Federal Reserve voting member Eric Rosengren’s speech on Friday, in which he expressed the view that low interest rates are increasing the chances of overheating the US economy, rattled both bond and equity markets.
Just as bond and equity prices have been rising in tandem, the fall in equity prices was always likely to be led a fall in bond markets. The US ten-year treasury yield rose on Friday to 1.67%. The yield on ten year gilts that have been driven to record lows by the action of the Bank of England have risen by 30 basis points in the past month.
Having failed to move in July when capital markets had prepared themselves for the likelihood of a rise, investors had pushed back expectations for the move to December, even post Janet Yellen’s Jackson Hole speech. What has changed so much between July and early September to persuade that now is the right time to act is any one’s guess?
More Federal Reserve members are due to speak in the coming week. On Monday Atlanta Fed President Lockhart, whose recent comments have urged caution, will be scrutinised to see if he too supports the idea of a move in September. Aside from the speeches there is another selection of economic data to be Inspected by economic analysts. The most important of which is likely to be Friday’s release of August’s inflation and consumer confidence data. Forecasts are for inflation to grow year on year at 0.9%. Other pieces of economic data that will draw eye of market analysts will be on Thursday, as we get a combination of industrial and manufacturing data, as well as retail sales and capacity utilisation. The dilemma for the Fed members to balance on September the 20/21st is that despite employment growth productivity remains elusive.
As much as it will be a busy week in the US, there will be plenty to ponder for the economists on this side of the pond. On Tuesday we get August’s inflation data, on Wednesday the latest unemployment rate. The main event will however be Thursday’s meeting of the Monetary Policy Committee. It was this meeting last month that the announcement of the rate cut and additional monetary stimulus were made. We will get to see the minutes of the meeting that preceded the announcement.