Correlation between commodity prices and stock markets, based on the performance of the US dollar, continued on Thursday. Global equity markets took a knock, particularly in the UK as commodity prices reacted once again to the stronger dollar. The combined impact of a speech from Mario Draghi, the ECB chairman, along with speeches from several of the Fed committee members on what the Fed might do next month with interest rates. underpinning the dollar strength.
The strength of the US consumer, or rather the lack of it, was evident again on Wednesday as Macy’s results failed to meet market expectations. The stock fell 14% as Macy’s cut its profit outlook by just over 10%. Later on Friday sees the release of October US retail sales data, expectations are for sales to be flat month on month for October. The benefits of lower oil prices still do not appear to be materially encouraging the consumer to spend.
On Thursday several members of the Federal Reserve spoke publically, including the chair Janet Yellen. The tone of the messages indicated that all members are continuing to attempt to prepare the market for a move in December.
Thus far the pattern, as was so ably demonstrated in the summer, is for the Fed to hint at a move in rates, the market wobbles and the Fed then pulls back. Are equities going to once again start the process, that despite the strong employment data, will prevent the Fed moving.
One can’t help but feel the Fed have put themselves in a very tight spot. Their desire to move away from a zero interest rate policy is completely understandable. Their attempt to continually communicate their desire to the markets, in an apparent to smooth the market’s reaction has just created a great deal of uncertainty.
The Fed appears scared of any market reaction, if they don’t raise the markets may form a bubble, if they do the markets might react very negatively. Markets are always prone to over react and misinterpret event whatever the circumstances. Trying to anticipate or second guess the capital market’s reaction is generally a mugs game, and the Fed should stop trying to play it
If they believe the time is right and the economy is strong enough, or the inflationary pressures are building they should act. If they believe that the circumstances are not right they should wait until they truly believe the timing is correct. The dog appears to be currently wagging the tail.