China trade may sway Fed's rate decision

Mon May 9, 2016 3:45am EDT
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By Jonathan Cable

LONDON (Reuters) - The Federal Reserve's debate over whether to raise U.S. interest rates in June may be decided in the coming week, as investors look for any cracks in China and evidence of a solid start to the second quarter in the United States.

A run of Chinese data is expected to show activity moderated in April after a strong showing in March. A Reuters poll forecast a small drop in all-important exports last month.

For much of the past year, China has been at the center of financial market turmoil, sometimes offering reassurance but mostly fuelling concern its economy - and global growth - are losing momentum.

"Trade figures always matter enormously to a trade-dependent nation like China, so April's exports and imports will be closely watched," Scotiabank's Derek Holt said.

Economic activity increased in the first quarter because of record bank lending. But worries about a commodity bubble and fast-rising home prices, as well as spreading debt defaults and bad loans, led regulators to tap the brakes on expectations of further aggressive stimulus.

Any evidence of a further slowdown in China could dissuade the U.S. Fed from tightening policy as expected in June.

Fed policymakers acknowledged last month there were risks to the U.S. economy and suggested two more rate increases were in store this year. That was only half what they thought when they tightened policy for the first time in a decade late last year.

Casting further doubt on the case for raising rates, the U.S. economy added the fewest number of jobs in seven months in April and Americans dropped out of the labor force in droves.   Continued...

The United States Federal Reserve Board building is shown in Washington October 28, 2014. REUTERS/Gary Cameron