Another nasty week last week for global financial markets, but now they have to face one of the biggest tests for years – the US Fed’s widely tipped first interest rate lift in more than nine years.
If it happens it will come around 6am Thursday, Sydney time, and it will crystalise more than a year of fear and loathing about the increase and the damage it could do to parts of the financial markets – especially emerging market debt, junk or high yield bonds, commodities and the value of the US dollar and other currencies.
The Fed’s decision and statements will be of greater importance (and fallout) to Australia than the Federal Government’s Mid-Year Economic Forecast (MYEFO) and budget update which is out tomorrow in Perth.
While we have already seen a lot of volatility in currencies, commodity prices, junk bonds and other fixed interest securities (especially emerging market debt) in anticipation of a Fed rate rise, there are now heightened concerns about market stability after oil prices plunged to new seven year lows late last week.
Further complicating matters have been the moves by the European Central Bank to further expand its quantitative easing spending, meaning the world’s two most important central banks are taking monetary policy in very different directions.
There was a nasty sell-off in junk bonds late last week off the back of the worst week for oil prices this year and that has in turn triggered a rise in fear levels.
More and more oil and gas loans are feared to be in danger of moving into default as oil and gas prices fall. Problems in two managed funds, one a mutual fund which shut last week in the biggest failure of that type of fund since the GFC, added to the fear factor.
There are some other less important data releases and events this week, but they pale besides the Fed meeting and decision, and its ramifications.
The last Fed interest rate rise was 9½ years ago, so a decision to lift rates will be a big deal or markets and investors.
Nearly all economists now believe a rate hike is almost certain, so that may cap financial market volatility.
But if there are any signs of a further problems, the Fed will be terrified of the possibility of a new financial crisis being triggered or made worse a rate increase, however small.
Still the language of the Fed’s post-meeting statement will be closely assessed, as will the usual quarterly forecasts and the post-meeting media conference from Fed chair Janet Yellen who will be quizzed closely about the pace of subsequent increases if there is a rate rise announced Thursday.
Before the Fed move, the week in the US though starts with consumer price inflation data for last month.
That’s out tomorrow night, our time, and won’t be a problem. Also on Tuesday the New York Fed manufacturing index is issued together with the October figures on capital flows.
On Wednesday, November data on industrial production is released alongside housing starts.
Also on Wednesday, the early or “flash” surveys on manufacturing activity in the US and Europe for December will be released (but no longer for China).
Thursday sees the reaction to the Fed’s decision, the latest current account data and influential Philadelphia Federal Reserve index.
On Friday the Kansas City Federal Reserve index is released together with the “flash” reading on US services sector activity in December.
In Australia, the Mid-Year Economic and Fiscal Outlook report tomorrow dominates. It will be issued a few hours after the minutes of the final Reserve Bank board meeting for the year are issued.
Bureau of Statistics figures on car sales for November are out on Wednesday.
And also on Thursday the ABS releases detailed job market data such as employment across industry sectors and unemployment rates for regions.
In Asia, India sees the release of inflation and trade data today, along with industrial production figures for Japan.
The flash readings for December manufacturing activity will be issued for Japan, India, Taiwan, South Korea and other economies.
And November’s house price figures for China are out on Friday.
And on Friday, the Bank of Japan announces its latest monetary policy decision. After the economy was hauled out of recession by updated data for the third quarter, there doesn’t seem to be any need for an expansion of the bank’s already very easy monetary policy.
In Europe, industrial output figures are out tonight, our time, employment figures will be released tomorrow night, final inflation and trade figures on Wednesday night and current account figures on Friday.
And on Thursday night, our time, European Union leaders meet to discuss Britain’s membership. British Prime Minister David Cameron earlier this month abandoned hopes he had for a new membership deal by 2016.
This could trigger more speculation about a possible British exit of the EU – that would in turn see the country’s credit rating slashed.
