The FTSE 100, S&P 500, Dax, Nikkei 250 and Shanghai Composite are in free-fall, and while equity investors may be finding short-term opportunities, for the Federal Reserve it is yet another headache.
With US interest rate hikes initially touted for a September lift-off, the combination of domestic economic data and the yuan devaluation’s increasing impact on global markets is complicating matters.
But while many investors have predicted a September rate rise, Anna Stupnytska, global economist at Fidelity Worldwide Investment, believes that markets will have to wait a little longer.
“Given everything that has happened in the past couple of weeks, September is now even more unlikely,” she said. “I still expect a December hike, but the distribution of risks is actually skewed towards next year.”
Stupnytska cited a slew of domestic and global factors that were already weighing against rates going up next month, and warned that they have now been exacerbated by the global equities downturn.
“The headline US unemployment rate is almost at the 5% equilibrium, but if we include broader measures such as part-time and discouraged workers the rate is still above the 9% equilibrium,” she expanded.
“This is exacerbated by the fact that wage growth is subdued – average hourly earnings and the employment cost index dipped in Q2 after going up for a couple of quarters.
“This suggests that there is slack in the economy; we are unlikely to see any wage pressure in the near term, and the inflation picture is even bleaker.”
The dollar has also fallen against the euro and yen, and this, says Dominic Rossi, Fidelity’s global CIO for equities, means that Fed tightening now could have dire consequences.
“There is a price shock coming the way of the US, and there is no threat of inflationary pressures likely to be seen in the next 12 months,” he said. “It would be wrong for the Fed to move at this stage, and would only serve to intensify those oncoming deflationary forces.
“Another shock will come in the form of trade data – trade between the developed and emerging markets will deteriorate, from both the currency and demand views. It is critical that the US trade deficit is allowed to expand to fill the gap that will arise from the fall of purchasing power, and it would be a mistake for the US to tighten here as well.”
Gavin Haynes, managing director at Whitechurch Securities, added: “September seems premature given the amount the uncertainty and the extent of the slowdown in China, and it is very unlikely that the Fed will want to make a move – a rate rise this early could prove dangerous and might derail the US economy.”
However, while there is scope for these influential factors to become more intense, Bill McQuaker, co-head of multi-asset at Henderson Global Investors, is more sanguine on the economic data.