October Rumors
Amidst the tumultuous run in equities over the last week, traders pared expectations of a September liftoff for the Federal Reserve as weak inflation coupled with worsening external financial conditions led to a rise in expectations that the FOMC would be forced to delay any policy adjustments. However, rumors are now swirling that October could prove the next date to watch, especially if inflation is able to start trending towards the levels targeted by the Central Bank’s mandate. Evidence of this comes amid a rebound in the US dollar after data released today showed that US durable goods orders rose more than forecast with the core number rising 0.60% and the regular figure up 2.00% month over month. Certain Federal Reserve voting members including Atlanta President Dennis Lockhart are sticking to the narrative that expects interest rates to rise this year. Analysts have attributed recent market volatility to investors preparing for the possibility that September will be the first hike in 9 years, contributing to the pace of exits from risky positions.
In another instance of the tail wagging the dog, markets are reducing forecasts for a September hike, hoping that the recent bout of volatility will be warning enough to Federal Reserve to prevent liftoff. To a degree, volatility was anticipated ahead of September due to the expectation that rising rates would create a selloff in equity markets while forcing a rebalancing in foreign-exchange markets as the stronger US dollar would force other countries to abandon their pegs. Currencies such as the Saudi Arabian Riyal and Hong Kong dollar, which are currently exchanged at a fixed rate to US dollars might be forced to move to free float as the dollar strength saps competitiveness from these economies. The volatility witnessed earlier in the week could be attributed to China, with its own problems seemingly at the epicenter of recent losses. However, in conjunction with possible risk-off moves being made by the smart money, the sheer scale of the momentum could be indicative that other forces were at play as investors and speculators reposition ahead of what could be policy normalization in coming months despite reduced forecasts for a September hike.
