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 Economists are about equally split on whether the long-awaited move
will come, though futures market trades are pointing to at least one
more month of the Fed delaying its 0.25 percentage point increase in
the fed funds rate.
But market participants say they've already priced in that rate
hike, and its exact timing will not shake their long term bets.
For some, the repricing of the S&P 500 in recent weeks, spurred
mostly by weakness in China and other foreign markets, may have
actually given the Fed room for the rate hike.
"It has made the world a safer place for the Fed to do whatever they
have to do in the next few weeks," said John Manley, chief equity
strategist at Wells Fargo Funds Management in New York. Traders have
already priced in the increase, and whether it comes in September,
October or December "isn't going to make an enormous difference," he
said.
Traders still expect the next month to be somewhat jittery, and may
be watching industrial output and retail sales data out of China
early next week for signs of just how weak Asian markets could be.
The CBOE volatility index spiked last month and its 14-day average
hit its highest since late 2011 on Thursday. Spot and 1-month VIX
futures are tracking each other and are both higher than 2- and
3-month VIX futures, in a rare inversion of the curve that points to
sharp short-term gyrations.
It has become the norm after a Fed meeting for stocks to be
volatile, often changing direction various times between the time of
the statement and the market close a couple hours later.
WILL THEY OR WON'T THEY?
Analysts say a large majority of the trading linked to a Fed move
next week has already been made.
"If the Fed can’t be confident that the market can handle a 25 basis
point hike, that doesn't play well with investors," said Michael
O’Rourke, chief market strategist at JonesTrading in Greenwich,
Connecticut.
Fed Chair Janet Yellen has repeatedly said a hike is data dependent
but she expects to begin raising rates before the end of 2015.
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Market participants are split on the meaning of a rate increase. For
some, it would be the stamp of approval the U.S. economy has been
expecting after a strong recovery in job creation and five
consecutive quarters of GDP growth.
Others fear a hike would stymie growth that has been sluggish and
also encourage deflation.
"I would be more concerned if they did not raise rates, because that
would be a sign of maybe slowing economic activity," said Peter Tuz,
president of Chase Investment Counsel in Charlottesville, Virginia.
Equities have been expected to fall on an announcement of Fed
tightening, as the central bank's ultra-easy monetary policy has
been a pillar of the rally that saw the S&P 500 more than triple
from early 2009 to May's record high.
However the recent selloff, which took major indexes into correction
territory, may give the market some stability however the Fed
decides to act.
"Selling has been extreme," said Frank Gretz, market analyst and
technician for Wellington Shields & Co, a New York brokerage, on a
Friday note. "The probabilities say a low is in."
The Fed has tried to signal its move to markets, but a Reuters poll
of economists gave the probability of a September move a 50-50
chance, down from a 60-percent median probability predicted in a
survey taken last month.
(Reporting by Rodrigo Campos; Editing by Nick Zieminski)
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