Market Strategy Radar Screen Weekly August 29, 2016

Git Along Little Dogies

It was round-up time at the Fed’s conference in Jackson Hole, Wyoming

From our perspective on the radar screen the Fed’s message has remained pretty consistent all along─essentially that it will raise its benchmark rate again when it feels that the time is appropriate for the economy and the decision will be data-driven.

From what we’ve observed we expect the Fed will consider a host of factors before taking action, including the relative strength of the dollar to foreign currencies, the progress in job creation, the pace of wage gains, and evidence of a level of reflation that would justify raising rates.

The message from Jackson Hole seemed clear to us: that the Fed very much wants to take on the next leg of interest rate normalization but only as soon as it feels it’s possible to do so without disrupting the current progress of what is a modest pace of economic expansion.

The fact that Fedspeak has been somewhat mixed of late is not surprising to us. It’s been the style of the Yellen Fed to have the more hawkish voices from among the Fed leadership speak out ahead of key meetings followed by less hawkish or even dovish comments by the Fed chair.

In effect, the chair’s comments in previous periods of Fedspeak have helped round out the sharper edges of hawkish Fedspeak voices from Regional Fed bank presidents.

Last Monday the Fed fund futures showed a 24% chance of a Fed hike in September, as well as a 30.5% chance of a Fed hike in November and a 51% chance of a Fed hike in December. By Friday after the Fed chair and others had spoken in Jackson Hole, the chances of a Fed hike for those same FOMC meeting dates had jumped respectively to: 42%, 47% and 64.7%.

Ironically, for all the steepness in the increased chances of a hike as measured by the Fed funds futures, the chances for a hike on those same dates stood substantially higher on the first day of 2015 at 86.5%, 89.4% and 93.3%.

Around the start of the year Fed Vice-Chair Stanley Fischer had said he was looking for four hikes by the Fed in 2016.

Now, well past the half-way mark of the year, it looks as if the data had other plans for the Fed. As of last week Mr. Fischer spoke of the possibility of two hikes before this year ends.

We continue to expect the Fed to raise once this year, in December, but not as early as September, nor in November ahead of the election. (We recall that the Fed ignored calls from outside the Fed to raise rates ahead of the UK’s Brexit vote, and we expect it to follow suit with the presidential election stateside.)

For now we’d think last week’s second-quarter GDP number (revised lower from 1.2% to 1.1%), mixed home sales data last week (a 12.4% jump in new home sales contrasted with a m-o-m 3.2% drop in existing home sales m-o-m), along with data in the GDP revision that showed strength from the consumer (consumer spending revised upward to an annual 4.4% rate) offset by continued weakness in corporate investment and corporate profits, will suffice to keep the Fed watchful but on hold in September.

With expectations for the non-farm payroll jobs report this week to show a gain of 180,000 jobs in August (down from 217,000 last month), a disappointment could turn expectations for two hikes this year down pretty quick. A large upside surprise, on the other hand, could raise market expectations for a Fed hike sooner than later. Ultimately we expect that the economic data crossing the transom in aggregate this week to show a continuation of growth in sufficient moderation to justify one rate hike from the Fed this year─in December.

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