At Jackson Hole, The Cranks Prevailed

31 Aug 2015 | Author: | No comments yet »

At the open: Stocks fall amid rate hike chatter.

Wall Street opened the week in the red after comments from Federal Reserve Vice Chairman Stanley Fischer over the weekend appeared to keep the door open for a rate hike in September.European Central Bank (ECB) President Mario Draghi may have skipped the US Federal Reserve’s Jackson Hole symposium this year, but he can not dodge its conclusion: Central banks can not steer inflation as well as they thought.Crude prices jumped after data indicated surprise cuts to U.S. oil production and as OPEC said it was ready to talk to other producers about the recent drop in prices.

Gold futures declined for the fifth time in six sessions as comments by a Federal Reserve official reignited concern that U.S. interest rates will climb this year. Less than six months into a stimulus program that Draghi promised would revive consumer-price growth, the euro area is facing renewed disinflationary pressure as China’s economy slows and commodity prices slump. The S&P energy index <.spny> reversed course and was up 1.05 percent — on track for its best four-day gain in seven years — boosted by ConocoPhillips , Schlumberger and Phillips 66 . Still, Wall Street was poised for its worst monthly drop in more than three years on worries about the health of China’s economy and the timing of a U.S. interest rate hike. Stubbornly low inflation along with the prospect of tighter U.S. monetary policy has kept a lid on the metal, which doesn’t pay interest or offer returns, unlike competing assets.

Inflation will likely rebound as pressure from the dollar fades, allowing the Fed to raise interest rates gradually, Fischer said at the global central banking conference in Jackson Hole, Wyo. The newest risk to prices highlights how in the 19-nation currency bloc — as in the US, the UK and other industrialized nations — headline inflation is still far below target even as the economy recovers. Fischer’s comments were “a bit more hawkish than people anticipated,” Tai Wong, the director of commodity products trading at BMO Capital Markets in New York, said in a telephone interview. “If the Vice Chair is friendly towards a hike, there is a higher possibility we may see one sooner rather than later, and that may be part of the reaction we’re seeing right now in gold.” Gold is paring gains from earlier this month, when a slowdown in China and a global market rout raised speculation that the Fed would wait longer before raising rates. Fischer’s remarks suggest the Fed could look beyond a week of stock market turmoil brought on by persistent fears that China’s economy is faltering. “The market turmoil will continue in the near future.

Rather than providing a refuge from the meltdown, bullion’s volatility rose along with a measure of equity turbulence, diminishing its appeal as a haven. China is the catalyst, but the real reason for the selloff is the nervousness about the first US rate hike,” KBC senior economist Koen De Leus said. The CBOE Volatility index, or VIX — known as Wall Street’s fear gauge — rose about 7 percent to 27.80 on Monday, above its long-term average of 20.

Wall Street closed flat on Friday after a tumultuous week in which the Dow Jones industrial average slumped more than 1,000 points at one point last Monday. The ECB’s Governing Council is to convene in Frankfurt from tomorrow to set monetary policy and Draghi is to present the quarterly economic forecasts at a press conference on Thursday. Investors will be keeping a sharp eye on economic data again this week, especially the monthly jobs report on Friday, the last one before the Fed meets on Sept. 16-17. Central bankers have an opportunity to discuss their predicament again starting on Friday, when they and finance ministers from the G20 nations gather for a two-day meeting in Ankara. At Jackson Hole, academics effectively delivered a beating to central banks’ confidence in their ability to predict and manage their key variables, by pointing out wide gaps in knowledge about how inflation works.

The two indexes lost about 12 per cent for the month, and nearly 40 per cent since mid-June despite repeated and unprecedented measures by the government to shore up the market.

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