Fed to dominate week of central bank meetings

The Federal Reserve building in Washington 1 September, 2015 – REUTERS

Reuters: The US Federal Reserve takes center stage in the coming week, eclipsing industry data from China, another grim inflation reading from the euro zone and rate decisions in Japan and Switzerland.

Guessing whether the Fed hikes rates on Thursday or opts for a later date, perhaps December, is something of a futile exercise because even the rate setters appear to be wavering and the decision will probably come down to the wire.

An unexpected drop in the jobless rate to 5.1% and an upward revision in second quarter growth to 3.7% support calls for a hike as the labor market tightens and utilisation is at its best level since the global financial crisis.

Yet, futures only price a 24% chance of a hike as emerging markets, particularly China, struggle, inflation remains benign and some notable Fed watchers, like former Treasury Secretary Larry Summers, argue against a hike.

“My best guess is that the committee is also confused about what the right decision is, and as a result they are waiting to the last minute with making a decision,” Torsten Sloek, the chief international economist at Deutsche Bank said.

“The cost of this approach is that market expectations become unanchored but they may view this as a small cost relative to sending strong signals ahead of a meeting where there seems to be limited consensus among (rate setting) members,” Sloek said.

China’s slowdown is likely to be a key worry for the Fed and a 14% drop in Chinese imports over the past year, the 10th straight monthly drop, along with an annual factory gate price deflation of almost 6%, does not help rate hike arguments.

Data on Sunday showed growth in China’s investment and factory output missed forecasts in August, raising the chances that third-quarter economic growth will dip below 7% for the first time since the global crisis.

Factory output rose 6.1% last month from a year earlier, less than the 6.4% expected but up from July’s 6.0%.

Fears of a hard landing, the prospect of deflation and billions of dollars spent on keeping the yuan steady raise the prospect of more rate cuts and currency devaluation by Beijing, setting markets up for more volatility.

In Europe, the key item will be final August euro zone inflation data due on Wednesday, likely supplying another arguments for the European Central Bank to beef up quantitative easing.

Price growth is seen holding steady at 0.2%, far off the ECB’s target of just under 2% and ECB President Mario Draghi has already warned that the euro zone could dip back into deflation on lower commodity prices and weaker growth from emerging markets.

The big inflation miss and a modification of quantitative easing are just the latest in a long list of troubles for central banks around the globe as developed nations struggle with weak growth and anemic inflation.

The Bank of Japan announces its rate decision on Tuesday and Governor Haruhiko Kuroda is expected to offer a bleaker view on overseas economies and may lower its assessment on the country’s exports next week, sources told Reuters.

Yet the bank already said it was not considering cutting or abandoning” the 0.1% interest its pays on excess reserves financial institutions park with the central bank.

The Swiss National Bank is also expected to keep policy steady but markets expect the bank to say that it was ready to cut the deposit rate even further into negative territory if necessary.

APEC finance ministers say will refrain from competitive devaluation

CEBU, Philippines (Reuters): Finance ministers from the Asia-Pacific Economic Cooperation (APEC) group said on Friday they were committed to addressing weaknesses in their economies but stressed they would not seek to gain a competitive edge by weakening their currencies.

“We will refrain from competitive devaluation and resist all forms of protectionism,” ministers from the 21-member group said in a statement at the end of a meeting on the Philippine island of Cebu.

“We maintain our commitment to strengthen economic growth and promote financial stability in the APEC region,” they said, even as they conceded risks to growth remained significant.

The Cebu meeting took place amid growing concern about the slowdown in China, the world’s second-largest economy, and recent swings in global financial markets following its devaluation of its yuan currency last month.

China has insisted that the devaluation was not part of a currency war, but was aimed at making its exchange rate reflect market conditions more closely.

Speaking at a closing ceremony, China’s vice finance minister said volatility in Chinese stock and currency markets was temporary.

“The exchange rate movements in the past month is totally because of technical reasons and factors, and will not affect the stability of financial markets in the future,” the vice minister, Shi Yaobin, told a press briefing.

APEC members include the United States, China, Japan, South Korea, Indonesia and Canada, and together account for 57% of global production and 46.5% of world trade.

On the whole, delegates to the two-day meeting have been circumspect in their comments, often speaking in bland terms about the need for greater financial integration.

But Malaysia’s deputy minister of finance, Johari Abdul Ghani, said all the talk of integration might not amount to much because decisions taken by APEC’s larger economies were having a big impact on smaller ones.

“The developed countries, the much stronger economic countries, also have to be mindful any action that they do will affect the smaller countries in APEC,” he told Reuters, singling out China’s devaluation and eventual rises in U.S. interest rates.

Malaysia’s ringgit has slumped by 18.87 percent against the dollar this year and is the worst-performing major currency in Asia.

“We want to have financial integration. But at the same time, when you have developed countries like America, China for example, anything that they do will affect some of the emerging countries. The impact of this is that the integration will not be able to come,” he said.