Now you see why we made such a big deal out of the Fed, Treasury yields, and data dependence on Thursday.
Allow us to show you two headlines that hit the terminal within eight minutes of each other Friday morning:
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FOMC’s Dec. Mtg ‘Still Most Likely’ Time for Next Hike: BofAML
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‘Let’s See Yellen Get Out of This One’:BoT-Mit on Sept Hike Odds
And that folks, encapsulates everything we discussed yesterday about data dependency.
The stronger the data, then theoretically the more likely it is that the Fed will hike in September. And this data was pretty darn strong.
So another blockbuster jobs print like what we got this morning (255K versus 180K consensus) should make September a sure thing, right?
Wrong. And everyone knows it. Hell, just look at Bloomberg’s front page:
We’ve reached a kind of surreal Goldilocks moment for US equities. For the first time in the post-crisis world, the whole question of whether good news is actually bad news because it raises the likelihood of a tightening cycle is no longer relevant. The Fed is on perma-hold thanks in no small part to the fact that hiking would create an even wider policy divergence between the US on one side and Europe and Japan on the other, so the market is free to celebrate good economic data without the attendant fear that it will trigger hawkishness in the Eccles Building. You can’t lose.
“Let’s see Yellen get out of this one and find something in the data to once again not raise rates in September,” Bank of Tokyo-Mitsubishi’s Chris Rupkey remarked after the NFP tape bomb. Oh don’t worry Chris, she will.
See Chris is asking the wrong questions. By the time the September meeting rolls around anything could happen to financial markets and that’s all that matters. Come on Chris, you remember last year right? We were sailing straight towards a probable September liftoff and then …. Boom. China devalues, the Dow crashes 1,000 points in minutes on Black Monday, and presto! Just like that, a September hike was rendered essentially impossible. Oh, and by the way, this is an election year. Here’s BofAML’s take:
“The Fed is likely to be encouraged by the strong jobs report. Provided the strength in jobs is confirmed with other economic data – including a return to mid-2% GDP growth in 3Q – the Fed will have sufficient reason to hike this year. We think the Fed will wait until December given that there are still global uncertainties on the horizon, as well as the US election at home. Remember that the Fed is operating with risk averse policy, which means particular sensitivity to potential shocks.”
Yes, “sensitivity to potential shocks,” but the problem is that by incorporating global financial conditions into the reaction function, the FOMC has added itself to the list of shocks. That is, if they want to be careful about “potential shocks,” then they can’t hike - ever. Here’s Citi’s Steven Englander:
“Investors still can’t bring themselves to price in a significant chance of September and this reflects somewhat justifiable reluctance to take measures that could be viewed as roiling asset markets in advance of an election. Of the seven NFP prints this year, three have been over 233k, four have been over 186k. If by September the election looks like a done deal, and we get another 200k+ NFP print, what odds do you put on Fed hike (assume they commit to not hiking in December)? The hike could be presented as a victory lap for Fed (and Administration) economic policy. My combined minimum odds are more than 35%, but the true risk could be higher -- market pricing in maximum of 20% now. So there is a gap.”
And here’s Goldman’s quick take:
“In light of the stronger-than-expected jobs report, we revised up our subjective odds of a rate increase at the September FOMC meeting to 30% from 20% previously. We kept the probability of an increase in December at 45%—implying a roughly 75% chance of at least one rate increase this year.”
See that’s the thing. This shouldn’t be “subjective,” on anyone’s part, least of all the Fed. That’s why data dependency is so important. It takes the subjective element out of the process thus making monetary policy an exercise suited to PhD technocrats. In the current arrangement, Atlas himself wouldn’t be up to the task of figuring out what the “appropriate” level is for interest rates.
We’ll simply close with a look across markets:
