We began the week in a tentative mood with central bank policy decisions continuing to weigh on financial markets. On Friday we saw the S&P close down 2.5%, while US treasuries closed nine bps higher. Asian shares last night continued this trend, suffering their sharpest declines since June, with bond yields here also on the rise. There are several factors at play here, the key one of course being the continued uncertainty around whether the Fed will act on lifting US interest rates as early as next week. The other more recent matter being the ECB and their decision not to extend QE at last week’s policy meeting. We have also had some disappointments from the Bank of Japan, with no sign of helicopter money or the 100 year bond, policies which had been eagerly anticipated. The question now is, have central banks started to change their tune on fiscal stimulus and its effectiveness?
The recent September Sell off would suggest the market is perhaps thinking about the idea. The Nikkei 225 lost 2 percent in the early hours of trade, while the yen firmed on the back of safe heaven demand. Japanese government bonds have also being sold off as markets in anticipation for next week’s decision from the Fed, opting for a wait and see strategy. European shares and the FTSE also opened up lower this morning. The currency markets have also decided to sit on their hands, as traders opt for the safe heaven currencies like the yen, while demand for higher yielding currencies like the AUD have been sold off.
We have no more than three Fed members due across the wires today with Brainard, Lockhart and Kashari all scheduled before the blackout period start at midnight on September 13. The speech from Brainard will be the most closely watched as she is regarded as a known dove, if we see a shift in her tone that is in anyway hawkish then expect to see some movement on the back of this. This morning Reuters have priced in a 23 percent chance of hike at the Feds Sept 20-21stmeeting.