It's all about the Fed now

It’s all about the Fed now with opinion divided about whether it will announce an increase in US interest rates at 4am AEST on Friday. Last night’s US market moves appeared to be a logical response to the possibility that the Fed will begin the gradual process of lifting interest rates this week. Share markets rallied, reflecting solid growth in the US domestic economy and the potential for the Fed to increase certainty and reduce volatility by acting at the September meeting. Bonds, on the other hand were sold in with yields rising in response to the potential for a gradual increase in funding costs.

US retail sales figures point to solid growth in the US domestic economy. Consumer spending appears to be holding up well in the face of financial market volatility and the prospect of higher interest rates. The improved job market is lifting spending power which bodes well for GDP growth in the current quarter. While US industrial production was weaker than expected this is probably more a reflection of soft global demand and previously high inventory levels than of the domestic economy. Last night’s data is unlikely to dissuade the Fed from lifting rates at this meeting if it is of a mind to do so.

The solid lead from US suggests a positive day for the local market today, although the quarterly index futures expiry and associated adjustment of positions in the stock market introduces and element of uncertainty to the day’s trading.