Fed – Sense of déjà vu
Recent US data have likely put a Fed rate hike at its 21st September policy meeting beyond reach, with a post-US presidential election rate hike now the more feasible scenario.
US labour market data for August – sandwiched between very weak ISM prints – suggest that there is still slack in the US labour market. Aggregate weekly payrolls in the private sector rose only 3.5% year-on-year, which in turn is likely taming inflation.
Job creation growth was stable at around 1.9% yoy, which in itself is compatible with a Fed hike in September. But working hours fell in August, earnings growth slowed further and the pool of potentially available workers has now increased for three consecutive months.
These numbers will have done little to convince Chairperson Yellen that the time for reflection is over and the market is now only pricing rate hikes of 5bp and 13bp, respectively, for the Fed’s September and December meetings.
There is a sense of déjà-vu and the path of least resistance is probably for the Fed to keep rates unchanged this month while keeping alive the possibility of a hike on 14th December.
Moreover, the Fed will have the added benefit in December of knowing the still uncertain outcome of the US presidential elections scheduled for 8th November.
The Fed remains apolitical and has in the past hiked rates in the run-up to US presidential elections, but a Clinton victory and a positive US and global market reaction are probably necessary if insufficient conditions for the Fed to hike with conviction.
Should the Fed hike in December, this almost unprecedented glacial pace of rate hikes would be in line with my January forecast of only one or two hikes in 2016.
Financial markets’ reaction to recent US data has been a familiar one – lower rates, weaker dollar and stronger EM currencies and global equities. But it has revealed little about how markets are likely to respond if and when the next Fed rate hike comes into clearer focus.