This week is going to be all about the US and the Federal Reserve's decision on whether it will raise interest rates. The market has only put a 30% chance on a rise but personally I think it’s too close to call.
With the Fed currently in a blackout period and no other major economic news due out this week, the market is patiently waiting. The uncertainty around their decision has caused volatility in the market – possibly more than we would see if they did actually announce a hike.
Of course, even if the Fed doesn’t raise interest rates this week, it is likely to begin tightening monetary policy very soon.
To get an idea of how markets may respond when it does happen, here is a summary of asset class performance during previous periods of tightening:

• US Equities – The US domestic stock market has tended to fare well, which is not particularly surprising given rate hikes are often a response to a stronger economic climate.
• Bonds – The 10-year treasury yield has tended to rise as investors reassess the likely path of short-term interest rates.
• Emerging Markets – The response for emerging markets is not as clear-cut. In 1994, it was a disaster when surprise hikes caused an outflow of capital and exacerbated the Mexican peso crisis. In 1999, emerging markets faired relatively well as they clung to the coattails of a boom in developed markets. Whilst in 2004, the emerging world was in the early stages of rapid economic growth. We think this time it will fall somewhere in the middle – it’s unlikely a 1994-style crisis will result but nor will there be a 2004-style boom.
• Australia – Australia is more likely to behave like an emerging market rather than a developed market due to the heavy weighting of our financials and resources sectors.

Keeping watch of Japan and Greece
The Fed aside, markets will also be keeping an eye on the Bank of Japan (BoJ), which is expected to announce its latest monetary policy decision this week.
We expect it will keep the size of its current stimulus measures unchanged. But unlike the Fed, the BoJ does like to surprise and there is always the possibility it will increase the size of its quantitative easing program.
Elsewhere, the Eurogroup is due to meet to discuss Greece this week. However, given the forthcoming election we don't expect any firm conclusions to be reached.
Aussie jobs buoyant
There was another healthy gain in Australian employment during August with 17,400 jobs created. There was also a slight fall in the unemployment rate to 6.2%. Not bad for an economy that is currently weathering a structural change from mining to dining. Indeed, the strength of the employment market during the past 18 months has surprised both economists and the RBA.
China
As markets remain nervous about China we don't expect August’s data to calm fears about a hard landing or provide hope that growth momentum is picking up. That said, not all the data has been bad and retail sales are better than expected.
In terms of inflation, CPI rose to a 12-month high of 2.0% y/y, up from 1.4% in July. The increase was slightly larger than most had anticipated. Much of the rise was due to a pick-up in food price inflation (from 2.7% y/y to 3.7%) driven largely by pork prices that have increased on the back of low supply. Looking ahead, we expect inflation to rebound over the coming quarters.
China's credit data for August confirmed that policy easing has led to a turnaround in credit growth. The data showed that both lending to the real economy and broader credit are accelerating – exactly as we'd expected after the recent shift to policy easing. Whilst this might raise questions about the level of debt, it should provide support for the economy in the short term and calm concerns about a hard landing.
Oil waiting for China calm
In recent times, the oil price has been highly dependent on sentiment towards China as reflected in the close correlation with the Shanghai equity market. We expect oil to find support and begin rising once fears around China calm.
The industry’s response to previous sharp price falls of modifying supply should also provide some support going forward. Drilling activity in the US has already fallen sharply and total non-OPEC supply should fall by around 0.5 million barrels per day (bpd) next year.
With global demand set to increase by around 1.5 million bpd in 2016, the market should be able to absorb higher Iranian supply without a big fall in prices.