Need to Know: China’s yuan gambit can keep our Fed-fueled party going

Wall Street types now and then like to show they didn’t flunk English Lit. by citing “Waiting for Godot” when talking about our long wait for a rate hike.

But last week, it really looked as though the Federal Reserve could lift interest rates next month. Maybe it’s time to switch the comparison from that play — about hanging out for hours to meet someone who never shows up — to some other great creative work, like “Here Comes the Hotstepper.”

Not so fast. China’s latest gambit could mean the Fed will hesitate a bit longer before taking away the punchbowl. And that comes after the Fed’s No. 2 Stanley Fischer said — essentially — “hold your horses,” helping the Dow DJIA, +1.39%  gallop higher by 242 points on Monday.

Worried about China’s slowing economy, the country’s central bank on Tuesday devalued its tightly controlled currency and triggered the yuan’s USDCNY, +1.8485%  biggest one-day loss in two decades. Which makes for a great chart of the day (see below), but it also actually could matter to U.S. investors.

“The yuan devaluation will now raise many questions about whether the Fed can still seriously consider raising rates this year,” said Craig Erlam, senior market analyst at Oanda, in a note. “The process of competitive devaluation among numerous countries that are easing monetary policy is effectively exporting deflation to those that aren’t, particularly those contemplating rate hikes.”

Erlam goes on: “Any move by the Fed to now raise rates could strengthen the currency by more than previously expected. Whether that will be enough to encourage the Fed to delay such a hike isn’t clear, but if they were not sure before, this certainly won’t help matters.”

Read more: A drag on Fed hike — analysts on surprise yuan move

Not convinced? You’re hardly alone, as other market watchers predict investors and the Fed ultimately will greet the yuan’s dive with a yawn:

Key market gauges

U.S. stocks might not be getting the message that the Fed’s punchbowl could stay out for longer thanks to China. S&P 500 futures ESU5, -0.41% and Dow futures YMU5, -0.48%  are both pointing to a lower open, though it’s still early. European stocks SXXP, -0.84% are down, with the weaker yuan viewed as a headwind for the eurozone. Chinese stocks wobbled Tuesday, then the Shanghai Composite SHCOMP, -0.01% closed flat.

Gold GCZ5, +0.58% is up, the dollar DXY, +0.02%  is little changed and crude oil CLU5, -1.62% is lower.

The stat

1.9% — that’s by how much the People’s Bank of China has devalued the yuan.

This might not look like a big number, but the blog Wolf Street is howling that the PBOC has “pulled the ripcord” in “a big way,” noting the currency’s daily moves had been “limited to a maximum 0.01%” over the past month.

The quote
Getty Images

Stephen Colbert

“Every night before I go to bed, I light a candle and pray that he stays in the race. And I also pray that nobody puts that candle anywhere near his hair.” — Stephen Colbert on how he hopes Donald Trump is still running for president when the comedian (we’re referring to Colbert) starts his “Late Show” run on Sept. 8.

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