The Federal Reserve, oh yes they will, oh no they won't.

After the falls of the previous week, global equity markets jockeyed around during the past week, closing modestly higher than where they started the week. The Vix index, or fear and greed chart, finished the week just above 15. With a few exceptions in the past years, the equity markets tend to stabalise as the Vix crosses 20. This week was no exception. All eyes will now be on what the Federal Reserve will announce on Wednesday. The market is now putting a low probability on the Fed raising rates at the monthly meeting. In the past weeks the economic data coming out of the US has been mixed at best. The Citi economic surprise index, which measures how economic indicators come out against expectations, having had a stronger summer has been falling back over the past weeks.

The dilemma the Federal Reserve face is a disappointing economic picture, however despite this there are signs inflation is ticking higher.  For example, August’s US industrial Production on Thursday reported a year on year fall of 1.1%. On Friday US core inflation, the measure that excludes the impact of petrol and food price changes rose to 2.3% against expectations of 2.1%. Despite expectations of a rate rise decreasing this week, the US dollar rose against its basket of other currencies. Yields on US treasuries finished the week close to where they started them.

Central bankers around the globe remain in focus, this week the Bank of England’s monetary policy committee unanimously voted to keep interest rates where they are. Mark Carney even went as far to suggest that he may look to cut rates again in the coming months. Mr Carney also expressed the view that the swift actions of the MPC, have been instrumental in combating the Brexit impact. One has to wonder if he truly believes this view, and if so we rather concur with the comments in the FT this week by Neil Collins that Mr Carney is deluding himself. What he should be more concerning himself with is the damage he is doing to the countries pension industry and liquidity in the corporate bond market.

Looking to the week ahead, Wednesday will be the main event. There is not much in the way of US economic data in the coming days that could further influence the Federal Reserve one way or the other. Wednesday will not only be a much anticipated day for what the Fed might do, but also expectations are that the Bank of Japan may add further stimulus measures to boost its economy. The Bank of Japan will also release its own assessment of the impact of its monetary policies. There has been speculation that one new measure the BoJ may introduce is to help shield bank profits against the impact of negative interest rates. 

Posted on September 18, 2016 .