This week is all about liquidity and interest rates. With the US Federal Reserve meeting and despite widely expecting to leave rates unchanged at this meeting, the Fed will probably announce a start to their unwinding of quantitative easing by beginning to sell US Treasuries back into the market – a move which is likely to push bond yields higher.
There are conflicting signals coming from US equity markets with the major indices trading at record highs last week and up 12% this year and investor sentiment also high. However, the swings in response to recent news-flows have grown with any good news feared to have an element of bad news built in, because it means that central banks will start to raise interest rates. This was evident in the higher than expected US inflation data last week, which has increased the probability of a US rate hike before year end to almost 60%. Also, last week’s good employment data for Australia also raised the probability of an RBA rate hike sooner, but still not till late next year. So comes the conundrum, will the likely outcome of higher interest rates sometime in the future be positive or negative for the (global) economy?
And lastly, Donald Trump has tweeted a new nickname for North Korea’s Kim Jong Un, mocking the leader as “Rocket Man” while White House advisers said the isolated nation would face destruction unless it shelves its weapons programs and aggressive threats. North Korea will be high on the agenda for world leaders this week at the annual meeting of the UN General Assembly, Trump's biggest moment on the world stage since his inauguration in January.