Fed Rate Hike Outlook What A Difference 8 Days Makes

We need to let something sink in: Investors today sharply reduced the probability of a an interest rate move next month, with trading in federal funds futures on Wednesday implying only a 24% probability they will act, compared with 48% on August 18. 

Of course, we can lay this at the feet of the China meltdown but that would be too glib, and too incomplete.

There is and has been a global slowdown, especially in the developing world and amongst the emerging “second-world” economies. China, Russia, Brazil, Vietnam, Malaysia, Indonesia, and parts of Eastern Europe have been stumbling and sluggish. The China equities route, a fair enough bell weather for all those economies, only pointed out the deficiencies.

William Dudley, president of the New York Federal Reserve Bank, added fuel to the speculation that rates won’t lift off in September. At a news conference in New York Dudley said, “From my perspective, at this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago.”

However, he did caution that, “Normalization could become more compelling by the time of the meeting as we get additional information on how the U.S. economy is performing, and more information on international and financial market developments.”

Odd that he should say that, because durable good orders for July rose 2.2%, above the expected 0.1% rise, but down from the 3.4% gain last month. June’s orders were actually revised up to 4.1%, so durables are looking hot.

A very good sign for the U.S. economy is that auto plants, which traditionally shut down for maintenance and retooling over the summer, stayed open for the season.

There are a few tailwinds the U.S. economy can use to ride through the turbulence of recent market movements.

Gold is down in afternoon trading about $16, almost all of which is due to U.S. dollar strength. The dollar is up about 1.35% against the euro and the British pound. It is up about half that amount against the yen.

Crude oil also took a hit because of the muscle-flexing greenback, but for the moment, fundamentals beyond currency fluctuations are weighing on oil. This week, while stockpiles were said to be down according to data dumps, gasoline reserves jumped. That will have a forward-looking downdraft effect on oil.

The U.S., China and Japan also cut their oil import levels last week and the week before. In the next few days we will have a fundamentals outlook for oil in the next two months that may surprise you.

We can’t forget equities in this climate, can we? Our current take is that we’re going to hover around the same levels we’ve been seeing the last two days and then the U.S. and Europe will bounce up. It’s hard to tell how badly damaged the Nikkei will be and how long it will take to repair itself.

However, we’re thinking that sometime in September or early October, a new probe of correction territory will be made. It might not be as convulsive as the moves of the last few days, but it will be quite noticeable.

Wishing you as always, good trading,