Saturday 23 September 2017

D-day looms for the US Fed's big interest rate call

The Federal Reserve Building. Photo: Reuters/Jim Young/Files
The Federal Reserve Building. Photo: Reuters/Jim Young/Files

Jonathan Cable

The Federal Reserve's debate over whether to raise US interest rates in June may be decided in the coming week, as investors look for any cracks in the much-examined Chinese economy and evidence of a solid start to the second quarter in the United States.

A run of Chinese data is expected to show activity moderated in April in the world's second biggest economy after a strong showing in March.

For much of the past year, China has been at the centre of financial market turmoil, sometimes offering reassurance but mostly fuelling concern its economy - and global growth - are losing momentum.

"Trade figures always matter enormously to a trade-dependent nation like China, so April's exports and imports will be closely watched," Scotiabank's Derek Holt said.

Economic activity increased in the first quarter because of record bank lending. But worries about a commodity bubble and fast-rising home prices, as well as spreading debt defaults and bad loans, led regulators to tap the brakes on expectations of further aggressive stimulus.

Any evidence of a further slowdown in China could dissuade the US Fed from tightening policy as expected in June.

Fed policymakers acknowledged last month there were risks to the US economy and suggested two more rate increases were in store this year. That was only half what they thought when they tightened policy for the first time in a decade late last year.

Casting further doubt on the case for raising rates, the US economy added the fewest number of jobs in seven months in April and Americans dropped out of the labour force in droves.

Retail sales figures due on May 13 are expected to show sales picked up in April after falling 0.4pc in March.

"Consumer spending started the year on a sluggish note, but we look for it to strengthen in Q2, both in overall terms and in the goods component specifically," said James Sweeney at Credit Suisse.

"The monthly April report on retail sales should provide preliminary support for our Q2 forecast."

Reuters

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