China activity and financial data for August was a mixed bag.  There were some promising signs that policy easing is starting to have an impact but with the important activity indicators still on the weak side.
 
In summary:

 
So there are some signs that the policy easing to date is starting to have some impact, but the transmission to the real economy remains slow, hampered by temporary factory closures and continued spare capacity. That simply confirms once again that real interest rates remain too high and further easing is warranted.
 
So what’s the US Federal Reserve (the Fed) to make of all of this?
 
Recent US labour market data has more than met the Fed’s requirement for some further improvement. As I said last week, if the Fed’s decision was just about the labour market they would be hiking this week.
 
However, it appears likely the Fed will delay the most anticipated US interest rate hike ever. Global uncertainties are simply too high and the China data yesterday didn’t bring any clarity, either way. And while the Fed will continue to see the disinflationary impact of lower commodity prices and the stronger US dollar as transitory, they do buy time.
 
That seems to me to leave three options for the Fed this week. With their associated probabilities they are:
1.  No hike with a dovish commentary saying the outlook for the world has deteriorated and there is no chance of a rate hike any time soon. (10%)
2.  A dovish hike, ie raise interest rates, but signal this is it until there is more certainty about the global outlook. (30%)
3.  No hike but signal they are getting closer which leaves October and December on the table for ‘lift-off’. (60%)
 
So it’s likely the Fed will delay lift-off. But I have considerable sympathy for the view put forward recently by the Senior Deputy Governor at the Indonesian central bank that the Fed should raise rates sooner rather than later and end the uncertainty. It looks like the uncertainty is going to linger a bit longer.