Is The Fed Telling The Truth?
This year, everyone wants to know if the Fed is planning to raise interest rates. July’s job creation number was revised to 275,000 from 255,000, but the August number again came in below expectations with a 30,000 job creation miss, as the US economy added just 150,000 jobs rather than the 180,000 the market was expecting. Not only did the total amount of new jobs come in lower than expected, approximately 25% of the new jobs were in the food and drinks sector, one of the worst-paying sectors. The gold price jumped immediately, as the previous day the Purchase Manager Index dipped.
All eyes are now on the interest rate decision in September, as even the major banks are thinking the Fed will finally move ahead and hike the most important interest rate by 0.25%.
Despite Credit Suisse and Barclays Bank supporting this thesis, that’s not what the futures market tells us, as the futures are indicating the odds of a rate hike in September are less than 25%.
Source: CME Group
However, the amount of trial balloons that have been aired recently seem to indicate that even though the Federal Reserve is willing to temporarily hold off on increasing the interest rates, it will very likely hike the rates at least once this year, to find out if any real damage could be done. Right after the report came out, the yield on the 10 year treasury note fell from 1.595% to just 1.55% and that’s a major move for what’s considered to be one of the least volatile government bonds out there.
In fact, this move was quite unexpected because it indicates that bond investors are now also ruling out any substantial rate hikes in the (near) future, which means the 10Y USD swap rates very likely won’t increase as fast as originally expected by Danske Bank.
Source: Danske Bank
We don’t expect a rate hike to occur in September, as it would really surprise us to see a rate hike after bad PMI results and worse than expected job numbers. On top of that, we can’t imagine a rate hike just two months before the elections in the United States. So if we would try to time a rate hike, we would expect it to occur in December, right after the elections.
And if the Fed hikes the interest rate, it will only do so to save face.