As the week kicked off, equities tumbled in early morning trade on Monday. The temporary panic took place on the back of a risk-off sentiment stemming from serious concerns over Chinese growth and the looming Fed rate hike. The S&P tested its downside limit and was offside nearly 7%, but quickly was bought up by bargain hunters. The S&P E-mini future was halted for several minutes just after the 9:30 AM (ET) open and when it came back online, stop orders iterated pushing the contract down 40 pts until sizable bids were located. The market reversed sharply and corrected to un-changed, before the afternoon. The S&P finished the week on a positive note at 1987.00 up 23 pts from the weeks open, recovering from the weekly lows of 1831.00.
The Fed has made it clear that the committee will respond to incoming economic data to enforce their dual mandate and not specific market moves. However, Fed committee members have acknowledged the recent market volatility and have expressed their views on what the policy implications may be, going forward.
It appears that recent stock moves have taken precedence over economic data, as the Fed speakers this week took a dovish tone, despite a surprise upward revision to US GDP, which should have helped to cement a rate lift off in Sep. The second GDP q/q estimate arrived at 3.7% vs 3.2% (exp), contrary to the first reading which disappointed markets at 2.3% vs 2.6% (exp). Stocks retraced earlier losses as risk appetite came back, late in the week.
Fed member Dudley (2015 Voter) stated, outright, that a Sep rate hike is “less appealing”. Dudley’s comments were the first in a bevy of dovish rhetoric that continued into the week’s end and were contrary to Fed member Lockhart’s (2015 Voter) comments earlier in the week, wherein he was calling for a hike. Fed’s George (Non-voter) also expressed concerns over the recent volatility. She expressed that it may bring about “complications” for the FOMC going forward and that the committee will have to observe whether or not the economy can withstand a rise in interest rates. Fed Arch Hawk Bullard (Non-voter) explained that the volatility in markets may not be “radical” enough to delay rate lift off, but also said that the committee may be more cautious of lifting rates if the “volatility” continues into Sep. On Friday Fed’s Fischer (2015 Voter) added that it is too early to make a decision on a Sep hike. As expected Fed Arch Dove Kocherlakota (Non-Voter) deemed a Sep hike inappropriate and prefers a delay until the second half of 2016. All in all, the hawks were cautious, the neutral members were dovish, and the doves were dovish.
The probability for a Fed Hike in Sep wavered on the back of the extreme moves in the equity market. The current Probability for a Sep hike settled at 43%, after moving as low as 25% amidst the chaos during Monday’s session.
The Jackson Hole Economic Symposium comes to an end on Saturday, with Fed’s Fischer on the card at 10:25 AM (ET). This time Fed Chair Yellen is absent from the event. In the past, former FOMC Chair Bernanke used the Jackson Hole Symposium as an outlet to break major policy news. The Fed’s QE program was announced at the event. However, it seems as though Fed Chair Yellen has forgone the opportunity at this year’s symposium. The next major data point will be the employment report due on Friday, next week. Current expectations are for 220K for the Non-Farm Payroll number and 5.2% for the unemployment rate. Traders will also keep an eye on the ISM reports and commentary late in the week from Fed’s Lacker (2015 Voter, Hawk).
-David Felkai Uptick GMA.
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