U.S. data dependency now includes Chinese data

US FOMC's heavy emphasis on international risks has had two important market implications. First, by implicitly broadening the definition of data dependency, it hasincreased uncertainty surrounding the rate outlook in the US. Second, by emphasizing that China may have more serious problems than previously anticipated, the FOMC has added fuel to the fire.

Over the past few days, a number of clients have asked us what data will be key to resolving these uncertainties. Although it is impossible to offer a precise answer, Yellen's remarks during the post-FOMC press conference offer some clues.

"We've long expected [...] to see some slowing in Chinese growth over time as they rebalance their economy. [...] there was downside risk to Chinese economic performance and perhaps concerns about the deftness with which policymakers were addressing those concerns. [...] So, a lot of our focus has been on risks around China but not just China, emerging markets, more generally in how they may spill over to the United States.

"Of course there are many uncertainties in the global economy but we're asking ourselves how economic and financial developments in the global economy affect the risk to our outlook for our two goals and whether or not they create unbalanced risks that we want to wait to resolve to some extent."

According to Societe Generale, the Fed wants to see the risks in the global economy resolved to some extent before it is comfortable raising rates. This can mean that:

Chinese activity data will have to confirm that there is indeed no hard landing.
US data will have to confirm that there are no material spill-over effects