Enough already - Get on with it!

The stabilization of Chinese markets during this last week has helped to lower volatility and ease safe haven flows into the USD and Japanese yen. The AUD was the best performing currency last week powered higher by better than expected employment data. The month of August saw 17K new jobs created, the unemployment rate easing to 6.2% from 6.3%, and with July job growth revised up. The Aussie also received some help from higher copper and iron ore prices. Surprisingly, the NZD was able to eke out a gain of 0.58% on the week despite a cut in interest rates of a quarter point to 2.75% by the central bank. The yen was the worst performer thanks to China’s stabilization, poor data, and political jawboning. Japan’s machine tool orders fell 3.6% on the month and producer prices fell by 3.6%. Prime Minister Abe’s economic advisor, Kozo Yamamoto, created a firestorm when he said that the Bank of Japan should expand its monetary easing program by at least 10 trillion yen at its October 30th policy meeting. Yamamoto said reaching the bank’s 2% inflation target in the first half of the fiscal year beginning April 2016 is an "absolute imperative".

All eyes will be on the Federal Reserve this week as they decide whether to increase interest rates for the first time in 9 years at its September 17th policy meeting. Last week, Fed Chair Yellen’s favorite jobs indicator, the US JOLTS data, showed a large jump in total job opening though hires lagged behind (for sixth month). However, the state of the U.S. economy hasn’t been the focal point for a rate hike since early August. The Fed was edging closer towards a hike at their September meeting before China devalued their currency, which caused equity markets around the world to destabilize spurring wild volatility and tightening of financial market conditions.

Well, we’re finally here. The stage has been set. The issues for and against a rate hike have been debated ad nauseam. The uncertainty of all of this has become unbearable – enough already and get on with it! Whatever the decision is, it will most certainly cause volatility to ramp up. A hike will deepen the fear of a global deflationary spiral caused by a stronger USD and/or a Chinese hard landing. Standing pat will keep the threat of such a hike ongoing into each subsequent meeting in October and December.

The U.S. dollar index has limped into the end of the week. Its technical condition is tenuous at best with the momentum indicators all pointing lower while it sits just about its 200-day moving average. It looks set to continue its sell off until the FOMC decision.

You’ve probably asked yourself what’s the big deal about a quarter point hike in interest rates when the fed funds rate is near between 0 and 25 bps. Well, if the Fed hikes by 25 bps then interest rates have effectively gone up by 100%. This alone has the ability to cause ripple effects across the derivative world of interest rate contracts which in turn has the ability to cause interbank credit risk. This is why the TED (TED spread definition) spread has been moving higher since China's devaluation. According to Head of Global Investment Research for Alhambra Investment Partners, Jeffrey Snider, the TED spread is now where it was in the weeks just following the flash crash of May 2010 and equal to October 2011, after the SNB pegged the CHF to the euro and the Fed reproduced dollar swaps globally.