All Eyes are on economic data for likely US rate rise
Washington (Aug 30) After a dizzying two weeks that saw a rapid plunge and rebound in equity prices, investors are looking forward to a week of economic data that may provide clarity on the likelihood of a near-term US interest rate hike and help tamp down the market's recent wild swings.
The economic figures will culminate in Friday’s jobs report that should reveal more about the strength of the US economy. Car sales, construction spending, the Federal Reserve’s “beige book” and jobs growth may show the economy is strong enough to withstand the first rate hike in nearly a decade from the Federal Reserve, despite worries about a hard landing for China’s economy.
Global stock markets were stung by severe swings in recent weeks, stoked by concerns that a slowdown in China’s economy may be more harsh than anticipated.
But after confirming a move into correction territory, the S&P 500 rebounded to score its best two-day percentage gain in over six years last week, as comments from Fed officials led some investors to believe the market turmoil and global growth concerns had diminished the possibility of a rate hike at the central bank's September meeting.
A September rate increase hasn’t been ruled out, however. 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. Traders in futures markets that bet on rate increases boosted September's odds after his words.
“There is a narrative out there that Yellen’s Fed is looking for a reason to delay the rate hike; I don’t think that is necessarily the case,” said Brad McMillan, chief investment officer for Commonwealth Financial in Waltham, Massachusetts.
“If we continue this run of strong data and if the market keeps coming back or at least doesn’t keep dropping, that makes September more likely.”
After a stronger-than-expected revision to second quarter gross domestic product and solid durable goods figures, another run of strong data this week could bolster the case for a rate increase next month. As of early August, most US primary dealers polled expected a September rate increase.
But traders 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 those paying a price.
Thomson Reuters data show third-quarter earnings expectations have dropped 6.4 percent for the industrial sector and 8.8 percent for the materials sector since July 1.
Should analysts continue to downgrade their expectations for third- and fourth-quarter earnings in those sectors or more broadly, that could make stocks more expensive, even after the recent selloff.
“It is more important to the US whether or not GM and Ford can sell cars there,” said Kim Forrest, senior equity research analyst, Fort Pitt Capital Group in Pittsburgh.
“That is probably what a softening of the Chinese economy could affect and it factors into the earnings of these companies.”