It’s About Time The Fed Stops Lying!

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Jackson Hole, Wyoming. Perhaps not the most logical place in the United States to have an extensive meeting of the different regional branches of the Federal Reserve, but nobody seems to be willing to touch a tradition which remained in force for approximately three decades, so the world’s financial press is still camping at Jackson Hole every year in August, waiting to hear if the Federal Reserve is planning to roll out new policies.

This year, everybody was obviously dying to hear if the Fed was planning to raise the interest rates anytime soon, even though the economy doesn’t seem to be fully ready for it. Yes, the job creation number from July has just been revised to 275,000 (from 255,000), but the August number once 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 jobs the market was expecting. And 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 which traditionally is one of the worst paying sectors in the United States. Of course, the gold price jumped immediately as this was the second piece of bad news in just two days, as the previous day the Purchase Manager Index dipped.

Source: WSJ

This wasn’t very surprising as over the past several months, the hard date didn’t share the vision of the Federal Open Market Committee which seems to become increasingly bullish about the American economy. After having released several ‘trial balloons’, all eyes are now aimed at the interest rate decision in September as even  the major banks are now 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.

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