Fed remains on track for lift-off in December

Market Movers

• German HICP inflation, which is released ahead of the euro area figure tomorrow, should be dragged down by the oil price decline and we expect it to reach -0.3% y/y in September. The pressure on Draghi for further easing has intensified lately and should increase further on indications that euro area inflation is falling back into deflationary territory.

• We expect the US Conference Board’s measure of consumer confidence to decline to 95.0 in September from an elevated 101.5, thereby mirroring the decline in the University of Michigan’s confidence measure. Important will be the labour market differential (jobs plentiful less jobs hard to get), which increased an impressive 7.5 points in August.

• Norwegian retail sales are released today and will provide an important clue on whether private consumption continues to hold up. The Danish government 2016 budget proposal is presented at 10:00 CET. See Scandi markets, page 2.

Selected Market News

Mixed messages from Fed officials. Yesterday, New York Fed President Dudley, who is seen as an important swing voter, told the audience at a WSJ event that the Fed remains on track to raise interest rates later this year, thus echoing remarks made by Fed Chair Yellen last week. While noting that the economy was doing ‘pretty well’, Dudley also said that international events had created some uncertainty on the US outlook. Furthermore he said that the first hike could come in October but also cautioned that Fed decisions would be dependent on data, rather than the calendar. As expected, Chicago Fed President Evans took a more dovish view, calling for rates to stay near zero until mid- 2016. In contrast, San Francisco Fed President is in the opposite camp, stating yesterday that ‘just a little bit’ more data would convince him that a hike is needed and that he expected the normalisation process to begin this year.

In our view, the Fed remains on track for lift-off in December, given our view that China is not in for a hard landing and that the upturn in the US is relatively robust. We expect that the Fed will continue the hiking cycle next year at a pace of three to four hikes in 2016.

Equity markets continue lower, catalysed by weak Chinese data. The nervous sentiment for risky assets continues this week and yesterday’s downbeat data on Chinese industrial profits showing an 8.8% decline in August added to the negative tone. The major indices closed the day lower, e.g. Euro Stoxx50 down 2.4%, S&P down 2.6%, led by declines in the energy and materials sectors. This morning Asian bourses are trading with significant losses. The next major Chinese data releases are the PMIs due on Thursday. However, they are unlikely to provide much comfort to markets, as we look for slight declines in the official manufacturing PMI (from 49.7 to 49.5) as well as in the Caixin service PMI (from 51.5 to 51.0).

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