RPT-GLOBAL ECONOMY WEEKAHEAD-China fears linger as focus on Fed sharpens

31 Aug 2015 | Author: | No comments yet »

5 things to know before the Singapore market trades this week: Aug 31-Sept 6.

London – Fears over the health of the Chinese economy kept world markets on edge last week and China will remain in focus, along with the question of whether the Federal Reserve will raise interest rates next month. Wild swings in world financial markets this week have shown how events in China can potentially disrupt the Federal Reserve’s carefully scripted policy plans.The turmoil in China has intensified the debate within a divided US Federal Reserve over whether the inflation outlook will be strong enough to justify higher interest rates as soon as next month, as policymakers around the world struggle to get to grips with the clouded outlook for the People’s Republic. Confusion over policy direction in the world’s two largest economies sent global markets into turmoil early last week, with the wildest price swings in years pushing investors to the exits.

The turmoil, triggered by a rout in Chinese markets, also flagged a broader risk that the U.S. central bank may struggle to meet its inflation target until the rest of the world plays along. Investors will be approaching markets cautiously on Monday (Aug 31) after last week’s dizzying ride with the big question still left open: Is the worst of the sell-off over? Markets will therefore be watching business surveys, factory orders and trade data from the world’s largest economy as well as the employment numbers due on Friday. “The week finishes with non-farm payrolls for August, typically the biggest market mover globally, and definitely on the Fed’s radar given ‘unemployment’ is already close to full employment and the Fed looking to gauge whether there is ‘some’ further labour market improvement,” economists at National Australia Bank said. European shares looked set to follow Asian shares and US stock futures lower on Monday, with Germany’s share index expected to open down 1.35 percent and France’s CAC 40 likely to fall 1.39 percent, according to IG.

As they try to nudge U.S. interest rates away from zero, policymakers might have to rethink a basic assumption that solid economic growth and swelling payrolls at home are enough to do the job even as the world’s second-largest economy stutters. “The years when China could keep on growing and pump things up – that’s over. On Saturday Stanley Fischer, the Fed’s vice-chairman, acknowledged the central bank is looking at China and its impact on other economies “even more closely than usual” but insisted there was still “good reason” that US inflation would head to the central bank’s 2 per cent target. But after confirming a move into correction territory, US stocks rebounded last week to score their best two-day percentage gain in over six years after Federal Reserve Bank of New York President William Dudley said last Wednesday that the likelihood of a Fed rate rise in September had dimmed. MSCI’s broadest index of Asia-Pacific shares outside Japan shed more than 1 percent and is set to fall 10 percent this month, its worst monthly drop since May 2012. Now, they are admitting things got more complicated after a rollercoaster week in financial markets caused by fears that China’s gradual slowdown could turn into a crash landing.

On Saturday, Fed vice-president Stanley Fischer told CNBC during the Fed’s annual conference in Jackson Hole, Wyoming, that the committee was “heading in the direction” of higher rates. They have plunged more than 40 percent since mid-June. “A pull back in the market was to be expected as some investors are taking profits after the two-day rally,” wrote Gerry Alfonso, director of Shenwan Hongyuan Securities, referring to a brief rebound late last week. Central bankers emerged from meetings over the weekend with conflicting views over the effect of the China-induced market turmoil, with some leading figures downplaying the threat to their own economies even as others emphasised new risks facing the world economy.

The recent market swoons follow a series of other shocks – crashing oil prices, weakness in Europe, the constant deflation threat in Japan – that have held down inflation globally. Before the biggie – Friday’s US jobs report – there are car sales, construction spending, the Fed’s “beige book”, trade figures and ISM manufacturing data to sieve through. Up to now Fed officials have argued those problems would have only a passing effect on U.S. prices, even as they kept pushing the timeline for reaching their inflation goal further into the future. However, western policymakers are still struggling to figure out how significant the weakness in China will prove to be – in part because of the opacity of the country’s data and complexity of its decision-making processes. Almost half a year since the ECB started pumping 60 billion euros a month of fresh cash into the economy, annual inflation data, due on Monday, will probably still show prices rose only 0.1 percent in August – nowhere near the bank’s 2 percent target ceiling.

But traders also are also mindful of the fact that the Chinese slowdown could hit US companies and their shares disproportionately in the second half of the year, with luxury goods companies and industrials among the groups paying a price. There is a growing chance the ECB will extend its stimulus programme beyond the planned completion in September 2016, and if inflation data misses expectations that likelihood will only increase. Some economists, however, question long-held views such as that rising employment will eventually drive up wages and inflation, pointing out that global forces now play a prominent role in that equation.

Thomson Reuters data shows third-quarter earnings expectations have dropped 6.4 per cent for the US industrial sector and 8.8 per cent for the US materials sector since July 1. The opening up of markets in former Soviet bloc countries, China’s entry into the World Trade Organisation, regional free trade pacts have all allowed capital and goods to move more freely, helping to even out and hold down costs. Traders said China’s government resumed its intervention in the stock market last Thursday and has been cutting holdings of US Treasuries this month to support the yuan, ahead of a high-profile parade this week. Investors sold $5.9 billion of emerging market assets between Aug. 20-26, a sharp increase from $1.5 billion the week earlier, according to Nomura fund flows data. In fact, as U.S. imports have increased to 15 percent of the national output by the middle of last decade from around 10 percent in early 1990s, inflation has been tracking import prices more closely, with headline inflation over that period matching the increases in prices of non-oil imports.

With the U.S. data recently looking decent, it’s hard for the market to know for sure where the Fed stands until the bank’s rate-setting group finishes up its meeting on Sept. 17 and releases its statement. A rebound in U.S. stock prices and a sharp upward revision in U.S. second quarter growth numbers may ease some fear that slow growth and volatility overseas will dull the U.S. recovery. Coming Up: Hong Kong retail sales outlook is clouded by the strong local currency and China economic slowdown, says Credit Agricole strategist Gary Yau.

The dollar eased 0.6 percent to 121.03 yen after rising to the week’s high of 121.76 on Friday following the Fed officials’ comments that kept prospects of a September hike alive. But renewed disinflationary impulses from around the globe could still make the Fed more cautious and intensify the effort to better understand how inflation works.

The parade has been planned for months and will provide President Xi Jinping with his first opportunity to publicly present himself to the world as China’s commander-in-chief. The city’s July retail sales are likely down 1.9% on year by value, according to the median forecast by a poll of three economists and weaker than June’s 0.4% decline. The market will watch the European Central Bank’s policy meeting on Thursday to see if it will be inclined to ease monetary policy further in the wake of the recent global market mayhem, though no imminent change is expected. US crude was down 1.3 percent at $44.62 a barrel after jumping more than 6 percent on Friday on frenetic short-covering fuelled by violence in Yemen, a storm in the Gulf of Mexico and refinery outages. Some researchers, for example, argue that “core inflation” – which strips out food and energy prices and is often used by bankers as their preferred gauge – may be less relevant in a world where futures contracts, global shipping and worldwide trade help even out retail level price swings for some of those goods. “I look at data and I think that we are in an unusual situation,” Michael Owyang, assistant vice president at the St.

Verified email addresses: All users on Independent Media news sites are now required to have a verified email address before being allowed to comment on articles. China Slowdown to Hit Asia Electronics Supply Chain: After several years of torrid expansion, the slowdown in smartphone sales in China is expected to hit Asian parts suppliers. China Places Cap on Local Government Debt: Chinese lawmakers have placed a $2.5 trillion cap on local government debt as Beijing looks for ways to address one of the major impediments to its economy.

Buying the Dips Doesn’t Work for Everyone: As the Dow Jones Industrial Average has lurched hundreds of points up or down — mostly down — in the past few days, investors have received one constant message: Buy on the dips. Oil-Price Plunge Could Push Down Home Prices in Three States: The plunge in oil prices increasingly looks like it is here to stay, and that could be bad news for home values in three states that are most exposed to job losses in the drilling fields.

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