The Economy: Markets and the assumed rate hike

Friday saw another ugly day on Wall Street. This follows what was until then a fairly average 8% "correction" in a bull market. Today should again be another down day and if Wall Street is off again tonight, pundits will be looking at the possibility of the "correction" turning into a crash.

Friday saw another ugly day on Wall Street. This follows what was until then a fairly average 8% “correction” in a bull market. Today should again be another down day and if Wall Street is off again tonight, pundits will be looking at the possibility of the “correction” turning into a crash.

Fear of the correction turning into crash could keep on hold the RBA’s all-but-announced rate hike, but the board of the Reserve will have to think carefully about the tactics of a rate hike in an election year.

The case for correction rather than crash is based on the continuing strength of the world economy. Economic strength is causing inflation to re-emerge as a serious threat confronting for the first time this generation of central bank leaders.

H’s Lex sees things from an American perspective, where national morale is low. It is more than a bit worrying that he himself is seriously concerned:

A venomous partisan rancour, on the eve of Congress’s August vacation, permeates the Capitol and a toxic contagion is spreading across Wall Street and into other global centres of finance elevating probability of the geopolitical and financial systemic threats Lex started documenting in late June.

The past two weeks have been horrid to Wall Street, financial engineering, derivatives, risk models, etc …

The severity of the global credit and equity markets fallout a function of the amount of global liquidity remaining after the markets impose new disciplines on the excessiveness of the ‘Great Liquidity Party’. Expect more tumultuous markets, a repricing of risk, more casualties and more downside but Lex does not see all the liquidity generated since 2001-02 evaporating and if it really gets hairy some Central Banks might blink … The preceding does NOT include a geopolitical shock occurring simultaneously with the market’s correction.

The Reserve Bank’s board meets tomorrow. “Well informed” journos and most bank economists are tipping a rate hike. The weekend attempt by the PM to blame the states for this rate hike is further confirmation that the Reserve is getting down off the fence. “The dog ate my homework.”