All Eyes on FOMC Minutes as China Looms
This week, we have two key events that will dominate the newswires and market sentiment. The first, on Wednesday, is the release of CPI data for the month of July from the US Labor Department. That will be followed a few hours later by the Federal Reserve Bank’s release of its latest meeting minutes. Now, the Fed is mandated by law to ensure two things; one is full employment and the other is price stability. Recently, we had the latest news on the US jobs front and, though, NFP figures missed analysts’ expectations, it still wasn’t discouraging. As far as the Fed’s dual mandates, the full employment aspect, then, seems to be on track. That leads to price stability, and expectations are that inflation could continue to be suppressed, but acceptable from the Fed’s point of view. What is critical is the core CPI numbers which are the truest gauge of inflation; core CPI neutralizes the impact of volatile components, i.e. food and energy price inputs.
China as the Fed’s Wild Card
So that means an imminent rate hike is definitely on the table, right? Not so fast! We have a third “factor” and that is the growing woes in China. Last week, the Chinese central bank (twice) lowered its Yuan guidance, depreciating the Chinese currency against the US Dollar to levels not seen in years. Investors, naturally, are fearful that the Chinese dragon might be on the verge of falling into an unfathomable pit.
Fed Minutes Recap
While some market participants may have been surprised at the People’s Bank of China’s tandem moves, the Fed likely was not. The chances are very good that the Federal Reserve had already been monitoring the situation in China very closely for any signs of brewing trouble. In fact, the Fed’s minutes or protocols could reflect that precognitive awareness. That is exactly what markets are waiting to see. Assuming the labor issue is moot, the Fed would still have to carefully balance its inflation view with growing global risks. The Fed could go one of two ways. The Fed could foresee global risks as a possible threat, in which case it might hint at postponing a rate hike. Or else, it can dismiss or downplay the potential risks, which could suggest an imminent rate hike is still a strong possibility.
Down to Business
The bottom line is that the FOMC minutes, is of course, the week’s key event. As a written chronicle of the Fed’s protocols, it could reveal how the Fed might react to ripples emanating from China in the future. If the Fed emphasizes the globally-generated risks to the US outlook then investors might see that as a factor that could derail the Fed’s plan to raise rates in September. However, if the Fed seems to be ready to go full steam ahead with a rate hike, despite global troubles, this will favor the US dollar and weigh on Wall Street.
On the Plate
RBA Minutes(Tuesday) – Is set reveal the protocol from the latest RBA meeting. Investors will eye any prospects of further easing from the RBA in the wake of china’s economic slowdown.
UK CPI& Core CPI(Tuesday)- Will dominate sentiment for Pound Sterling. If UK inflation will pick up, the Sterling could enjoy a positive momentum especially vs its low yielding peers the Euro and the Yen.
US CPI & Core CPI(Wednesday)- If US Core CPI begin to crawl above the 2% mark that could become a catalyst for future rate hikes , and hence will be favorable to the Dollar.
FOMC Minutes(Wednesday)- The main even of the week. If the minutes will reveal the Fed is determined to push forward with a rate hike in spite of global risks , this will favor the dollar and vice versa.
Chart of the Week – Apple stock