Global recap post FOMC

US

“Almost all” FOMC members thought it was a bad idea for a rate hike back in July, which really makes it no surprise at all that the September vote went 9 to 1 to push it back one more time. Will they finally play their card six weeks from now at their October meeting? Or will they hold it for one more round, aiming for December? Or perhaps they will pass instead altogether in 2015, hit by their new pillar of policy: the health of China and the emerging markets. Yet even for the most aggressive of hawks, the latest week of economic data do not point with any urgency to a less accommodative Fed.

Rather than rejoicing that interest rates would remain at rock bottom for longer, investors sold shares and the U.S. dollar tumbled as investors worried about growth in the U.S. and in the global economy. While stocks in Asia were more resilient with only three of 12 indexes declining, all except the IBEX declined in Europe on the week. While the Dow and S&P edged lower, Nasdaq inched higher from a week ago.

The Fed held interest rates at record lows as concerns over an increasingly weak global economy overshadowed evidence of a resilient U.S. recovery. In maintaining its zero to 0.25 percent federal funds target range, the FED warned that recent turmoil in the global economy may “restrain economic activity somewhat” as well as push down inflation in the near term. That line was among the biggest changes from July’s policy statement, and seemed to be key to the decision to not increase rates. The U.S. dollar tumbled after the announcement but stabilized on Friday. Stocks dropped as well.

In the end, the Federal Reserve took the turmoil in international markets into account and left its policy fed funds rate unchanged at zero to 0.25 percent.

Europe

Equities retreated on Friday and in the process wiped out gains from earlier last week and then some. The trigger for the selloff was found in the FOMC announcement on Thursday. For the first time, the Fed added the phrase that it was “monitoring developments abroad” to its statement, which now has investors concerned about the health of the global economy. The Fed cited concerns over global economic headwinds, volatility in the stock market and low inflation for their decision to leave its key interest rates unchanged.

The week ended as it began with equities declining. The beginning of the week’s plunge was attributed to the disappointing August data from China for industrial production and retail sales. But the rally midweek was fuelled by investor hopes that the Federal Reserve would hold off on raising interest rates until December. However, investors’ reaction was the opposite of what was expected.

Asia Pacific

Despite the volatility only the Nikkei (down 1.1 percent), Shanghai Composite (down 3.2 percent) and STI (down 0.3 percent) ended the week lower. Of the 12 indexes followed here, only the Nikkei and Kospi remain positive so far in 2015. While the Federal Reserve’s decision helped ease fears of capital flight from emerging markets, the inaction by the U.S. central bank and the emphasis on global developments served to rekindle worries about weakness in both the U.S. and global economies.

In Australia, shares extended gains for a third day after RBA Governor Glenn Stevens presented an optimistic view about the Australian economy and said that the bank was “pretty content” with its current benchmark rate (2 percent). The All Ordinaries added 1.9 percent on the week. The Sensex also rallied for a second week, this time advancing 2.4 percent.

While most Asian equities reacted favourably to the Fed’s decision — it helped ease fears of capital flight from emerging markets — stocks in Japan and Singapore retreated Friday. Nevertheless, gains were muted as the Fed’s cautious stance as well as dovish comments from Fed chair Janet Yellen raised new questions about U.S. fundamentals and the strength of the global economy

Looking ahead

Expectations are not looking for a strong week. Existing home sales start things off on Monday and are expected to post a sizable decline followed, however, by FHFA house prices on Tuesday which are expected to bounce higher. Thursday is the heaviest day on the calendar when a drop is expected for durable goods orders, one tied however to a monthly downswing for aircraft and not to broad-based weakness. New home sales are also out on Thursday and only a small gain is expected. And the week ends with a second look at consumer sentiment where only modest improvement from a dismal flash reading is forecast.

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