Holes in the case for a September Fed hike

The constellation of adverse news from China continues to provide ample fuel for the risk-off theme in global markets. August's Chinese manufacturing PMI fell to its weakest reading since 2009.  Meanwhile, the renewed fragility of Chinese equities - now down some 32% since their June peak - alongside lingering anxiety about whether the Chinese authorities will permit a further depreciation of the yuan also highlight the uncertainty about how quickly growth in China is slowing down. Scepticism of its ability to hit the government's 7% GDP growth target for 2015 is likely to persist even if upcoming data were to stabilise, with the unambiguously sharp impact on global commodities and commodity currencies putting the expected upturn in inflation in developed economies in doubt. Brent crude oil prices notably fell below the $45 reached in January as the resilience of supply in the face of weak prices continues to surprise.

"The symposium topic at the Jackson Hole conference (Wed to Fri) will therefore prove a timely opportunity for central bankers, finance ministers and academics to opine on the implications for markets. The expected absence of FOMC Chair Yellen, however, leaves little room for the Fed to explicitly communicate any intention to begin normalising policy in advance of its September meeting. And, with all the downside risks identified in the minutes of the FOMC's July meeting seemingly becoming more pressing, a September first hike from the Fed now seems still more finely balanced", notes Lloyds Bank.

Inflation trends benign, but activity growth still solid. In the face of global risks, the burden remains on developments in the data to convince Fed policymakers of the merits of a policy tightening. 'Core' PCE deflator (Fri) trends are key to the Fed obtaining 'reasonable confidence' that inflation will indeed return to its target, but the rate seems likely to remain at a subdued 1.3%.  However, GDP growth for Q2 is expected to be revised up to a solid 3.2% annualised pace on the second estimate (Thu), with durable goods orders for July (Wed) expected to show firmer growth at the outset of Q3. However, it is the employment report for August, due in early September that will shoulder the heaviest burden of proof: with solid payroll growth almost taken for granted, more convincing developments on wage growth will also be needed.

A weak inflation picture alongside better activity is also likely to be seen in European data this week. The German IFO (Tue) could firm further after unexpectedly strong 'flash' German PMIs for August. But German inflation (Fri) will face the headwind of weaker oil prices which seems likely to retard the uptrend in headline readings despite some evidence of firmer 'core' inflation on the back of a weaker euro exchange rate. Meanwhile, the second estimate of UK growth in Q2 (Fri) is unlikely to be revised from its initial 0.7% q/q print. Consumer spending is likely to be a key driver, with real incomes lent support by a subdued UK inflation outlook.

"With immediate Greek event risk receding into the background in the aftermath of the Greek bailout agreement, the announcement of a snap election by Greek PM Tsipras, possible from late September, could in fact be seen as a positive development. Holding the potential for the formation of a more stable government purged of its obstructionist elements, it could improve the chances of the reform programme's implementation.  Elsewhere, pressure on currencies from weakening commodity prices creates scope for renewed geopolitical tensions, with the Russian rouble notably approaching its January crisis levels. Meanwhile, flaring tensions on the Korean peninsula could provide a further brake on global risk appetite", says Lloyds Bank.