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Summer hike in the US off, then on…now off again?

14 June 2016
Fed, FOMC, US
It’s been a bit of a roller coaster ride for the US Federal Reserve (the Fed) rate hike expectations over the last few weeks. Following all the volatility and angst at the start of this year, markets had moved to price in virtually no chance of a rate hike this year. Then as some of the activity data started to improve and following various statements and speeches from Federal Open Market Committee (FOMC) participants, a summer (June or July) rate hike looked to be on again.  But then came THAT payrolls report with markets now not pricing a full 25 basis points (bps) hike until December, and even then only just.

Source: US BLS

But being data dependent,  the data has to fall into line. There’s no doubt the May payrolls report was a shock to the market, and no doubt to the Fed.  Less clear is what the data is actually telling us.  There are a number of options:  
 
  • Firstly, it could be that the labour market, which typically lags activity, could be ‘rolling over’ following the weak GDP prints for the fourth quarter of 2015 and the first quarter of 2016.  
  • Secondly, as I wrote here following the April report, lower payrolls growth could be consistent with full employment, especially if the unemployment rate continues to fall and wages continue to tick higher (which they did).  
  • Thirdly, it could have just been a rogue result.  

Markets have been quick to accept the low growth version of the story, but it’s not clear that’s the correct interpretation, at least not yet. Other labour market data looks okay. In particular, initial jobless claims remain at low levels and job openings are at record highs. Furthermore, the latest Beige Book (the Fed’s Summary of Commentary on Current Economic Conditions) made repeated references to tightness in the labour market and difficulty in finding skilled labour.

Source: Bureau of Labor Statistics
 
The problem for the FOMC is we won’t know the answer till we see more…you guessed it….data. That means they wait.  So no hike this week, but one thing we take from latest FOMC participant’s comments is they clearly want to push on with normalising interest rates. Expect the Committee to continue to talk of the need for higher interest rates in the future and even a possible hike in July, should the data support it of course!

This blog post has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act). An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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