Global Economic Outlook: Rates Hike a Certainty?


International markets are uneasily relaxed today, as investors and speculators position for a September Fed rates hike. Chinese Yuan devaluation surprised markets last week and may have a subtle influence on that hoped-for September outcome.

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Economic Indicators

World Indexes and Forex Rates

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Commodities

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In the Calendar This Week

Mon 17 August
Japan Prelim GDP q/q (actual: -0.4% expected: -0.5% previous: 1.0%)

Tue 18 August
UK CPI y/y (expected: 0.0% previous: 0.0%)
US Building Permits (expected: 1.21M previous: 1.34M)

Wed 19 August
US Core CPI m/m (expected: 0.2% previous: 0.2%)
US FOMC Meeting Minutes

Thu 20 August
Japan BOJ Press Conference
US Unemployment Claims (expected: 272K previous: 274K)

Fri 21 August
China Caixin Flash Manufacturing PMI (previous: 47.8)
Germany Flash Manufacturing PMI (previous: 51.8)
Canada Core CPI m/m (previous: 0.0%)

Making The News

Today’s GEO considers market expectations of a Fed rates hike in September and what Yuan devaluation may mean for this widely anticipated event. August’s remaining US employment figures are being closely watched for confirmation but the pointer may lie elsewhere.

Dollar Positioning Into September

Speculators and many investors are long the US dollar in anticipation of the Fed rates hike in September. Even those harboring doubts that a hike is a fore gone conclusion have to be cautious that they do not get their positioning wrong – or miss the opportunity – if the Fed does hike rates. This is the classic market dilemma where it is less a case of “risk of loss” and more a case of “risk of missing an opportunity”.

Potential Shocks Discounted

Some potential sources of shock disruption still remain, such as derailment of Greek Bailout negotiations or a sudden, unexpected move by the Peoples’ Bank of China. Although the Greek situation is far from resolved, and a sustainable path to growth not evident, the Greek situation for now has become a sleeping dog. Approving grumbling from the Eurogroup and from Germany seem to signal to markets that Greece is out of the picture for now.

China’s shock yuan reference rate adjustments had caught the market off-guard – and after they said they wouldn’t do it again – the PBoC sneeked in another two small devaluations. Overall, the impression is that they’ve fiddled the rates for now and that all the equity crashing and slumping is under control, so markets are not on edge with China and have turned their focus back to speculation.

Signs Of Irrationality and Denial

xbt.social argues that this is the classic psychology of denial that precedes a more virulent onset of volatility and a return to the former trend of decline. In the history of markets there are many examples where legs of decline are punctuated by a seemingly complacent return to former market activity – in complete denial of the deteriorating fundamentals and socio-economic conditions that characterize economic decline.

Chinese Yuan Devaluation May Stay The Fed’s Hand

Analysis at CCN.LA has been maintaining, for over a year, that the time of yuan devaluation will eventually arrive. A growing Chinese economy would not need to engage this tactic because its domestic and regional repercussions are undesirable and unpredictable. The fact that China has embarked on the route of currency devaluation is a direct result of slowing industrial production amid falling demand – both locally and abroad. The health of the world’s third largest economy is, therefore, in trouble and the global economy cannot sidestep the consequences of China’s slump

For this reason, it is being alleged by some that China may be “doing the Fed’s work for them”. The argument is that the Fed has dragged its heels to, firstly, end QE and has showed reluctance to raise rates – a Chinese slowdown is the perfect excuse for the Fed not to raise rates in September, or in 2015.

The disappointment will be severe – not because higher rates are needed – but because a deluded market has become fixated on the timing of this “medication event” and has positioned in the hopes of squeezing a few drops of profit from the theater premiere.

Failure to raise rates will see the US dollar react in unknown fashion, see equities continue their tortured uphill struggle, and increase the ill-health of bond markets (the actual source of interest rates). Said Ron Paul to CNBC:

She’s going to be more hesitant to raise rates because she sees how fragile the global economy is. – Ron Paul

Also In The News

Japanese Economy Contracts, Investment Declines

Kuroda

Kuroda thinks Japanese central banking is a laugh.

Data released this morning showed Japan’s economy had contracted last quarter as consumers and businesses withheld spending and exports fell by 4.4%.

GDP shrunk 1.6% since the beginning of 2015 and consumption dropped for the first time in a year.

European Optimism On Prospect of Greek Bailout Deal

German Chancellor Angela Merkel said in an interview over the weekend that the IMF would be involved in the next Greek Bailout package. German Parliament will be meeting to approve the package in a special session this Wednesday. They act as if the Greek drama is a big drag and that they actually have lots of other work to do but the truth is this is the most significant play of their political lives. The name of the game is: Avoid Greek Default At All Costs Or We Go Down.

GEO Commodities Indices Early Warning System

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CFTC Commitment of Traders – Currencies

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Final Thoughts…

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This analysis is provided by xbt.social.

Global Economic Outlook is published every Monday on CCN.LA Readers can follow Bitcoin price analysis updates every day on CCN.LA

Disclaimer

The writer trades Bitcoin. Trade and Investment is risky and subject to probability and market changes. CCN.LA accepts no liability for losses incurred as a result of anything written in this report.

Charts from TradingView, financial data cartoon from Investing.com, image from Shutterstock.