The US Federal Reserve will definitely probably raise interest rates this year. So said Fed boss Janet Yellen towards the end of last week.
So the September hold was a blip. You can still expect a rise by the end of 2015.
That is, unless there are any economic surprises.
I’ll believe it when I see it…
Back-pedalling on interest rates
At the end of last week, Yellen tried to introduce some clarity back into monetary policy. I’m not sure what she was thinking exactly, beyond: “Hmm, markets seemed to be rattled by my overt dovish-ness at the last press conference. Maybe they’ll go up if I rein it in a little.”
It seemed to help a little at first. After Yellen’s late speech on Thursday, US stocks began the day with a decent showing on Friday. Meanwhile, US economic growth in the second quarter was revised higher. But in the end, they closed mixed, with the Dow Jones higher and the S&P 500 dipping slightly.
Of course, the main reason for Yellen’s delay – or certainly, her references to “international” events made it seem like that – is the trouble in emerging markets and China, and the potential knock-on impact on the US economy.
And that’s no surprise. The carnage in China and emerging markets has rattled investors across the globe. Plunging commodity prices and tanking emerging-market currencies have led to fears of deflation taking hold, swirling the entire global economy into a vortex from which there is no return.
As esteemed a journal as The New York Post is now fretting that the US cannot afford to import Chinese deflation: “As trading partners struggle with slowing growth, producers cut pricing to buoy growth. When that arrives [in the US], we are importing deflation.”
So it’s a widespread narrative. However, as is often the case with widespread narratives, it might also be wrong.
China is less ugly than you think
The thing is, China’s problems just may not be as bad as they look. Yes, we know that the official data is fiddled. But that’s not a new thing – we’ve known that for a very long time indeed.
And the fact that China’s economy is slowing isn’t new either. It started slowing in 2012. It’s just that not many people were talking about it then, or fretting about it as much as they are now.
It’s got to the point where we’re at the stage where investors are now so gloomy, that there is probably greater potential for positive surprises than for negative ones.
Here’s a very specific example: on Friday, sportswear giant Nike saw its shares rocket by 9% – partly because sales in China are going great guns. Sales of footwear in China and Taiwan “surged 36%” in the quarter to the end of August, and clothes sales rose 22%, reports Richard Blackden in the FT.
So, while the likes of Caterpillar and anyone who relies on the commodity extraction and production business are suffering amid the mining slowdown – as you’d expect – not every China-exposed company is feeling the strain.
And this isn’t restricted to individual companies. Despite the generally lacklustre economic data, and the understandable scepticism with which people treat Chinese data, various indicators suggest that things are turning around.
For example, as Bloomberg reports, its China Monetary Conditions Index improved for the second month in a row in August. That’s the “first back-to-back gain since 2013”. These sorts of improvements “in the past have tended to presage either an acceleration or a stabilisation in economic growth”.
I’d still be surprised if the Fed ends up raising rates this year – so far it’s been hard to lose money by underestimating the Fed’s appetite for tightening monetary policy.
But China may not be a feasible excuse to delay for very much longer.
In the latest issue of MoneyWeek magazine, we look at why things aren’t as bad as they look for China – and what opportunities that might reveal for investors. Sign up for here your subscription, if you haven’t already.