Monday, August 31, 2015
Stocks appear on track to start August’s last session in the red following modest weakness out of China and Europe. Many will be happy to put August in the rearview mirror, but the forces that caused the recent market turmoil are still with us.
The China situation remains unsettled, with a growing number of market participants now willing to entertain worst-case outcomes for that economy. A bigger-than-expected Chinese slowdown will no doubt have implications for the global economy, but the impact will be far more severe for the emerging world and not that much of a big deal for the U.S. economy. But as we saw in last week’s market reaction, direct economic impact and financial market impacts are two different things. Major market weakness and volatility of the type we saw last week can seep back into the real economy.
It is this indirect impact through financial markets of the emerging Chinese situation that has some folks hoping will prompt the Fed to hold off on announcing its first rate hike in September. Comments from key Fed officials during the thick of last week’s market turmoil gave credence to these hopes, though the buzz coming out of Jackson Hole conclave appears to leave September very much on the table. I don’t think the Fed should be letting the market lead its monetary policy stance, though the FOMC’s prior behavior on this count is less than stellar.
That said, a lot will depend on this week’s jobs data. I remain confident that we will get another steady-as-you-go type of jobs reading this Friday, with some improvement in wages as well as the unemployment rate. We will see what happens, but China and the Fed are the two big questions for this market at present.
Sheraz Mian
Director of Research
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