Markets dialed up the odds of Sep rate hike in the US. The spotlight, this week, was on the Non-Farm Payrolls release, while the results did not seal the deal for a definite rate lift off at the Sep Fed meeting they did illustrate that a solid pace in employment growth is intact.

The economic releases kicked off with a PCE inflation reading, the Fed’s favored inflation metric. Monday’s US PCE Core 1.3% y/y reading, was slightly above expectations of 1.2% y/y, but well below the Fed’s 2% threshold. Going off of recent inflation numbers, it is clear that the inflation component of the Fed’s dual mandate is unlikely to steer the Fed’s intended path in the short term. Later on Monday, ISM Manufacturing PMI came out under expectations at 52.7 vs 53.5 (exp). The report showed that the manufacturing prices sub-component, a proxy for inflation, ticked back to 44.0 vs 49.0 (exp). Wednesday’s ADP employment survey came out below expectation as well, at 185K vs 216K (exp) and served as preview to the possibility of a weaker Non-Farm Payrolls print to follow on Friday. Later, the ISM Non-Manufacturing report beat expectations and printed 60.3, the highest since Aug 2005. The employment sub-component also ticked higher. The most watched report, US Non-Farm Payrolls, came out on Friday morning. With a backdrop of mostly negative economic data prior, it was taken as an upbeat report despite arriving slightly under expectations at 215K vs 222K (exp). The Unemployment rate held steady at 5.3%.

The initial reaction was muted, contrary to the large knee-jerk spikes that typically accompany this report. The pop, after the fine points of the report were carefully read and researched by market participants, was largely faded as pundits subscribed to the view that a solid pace in employment growth is intact and that it may spell a higher chance of a Sep Fed hike.

Fed commentary this week had a hawkish tone and may have been the primary factor in markets reflecting an increase in the odds of a Sep rate lift-off. Fed watcher Hilsenrath, explained that the Fed will not require an increase wages before hiking rates. Later in the week, Fed’s Lockhart (2015 Voter), said that “..a rate lift-off could be seen as appropriate in September”. Fed’s Lockhart has been neutral Fed member, though after comments this week, it appears that his membership in the hawk camp at the Fed has been validated. Fed’s Powell (2015 Voter), has not confirmed his position on the Sep Fed meeting, but explained instead, that there is other important data incoming. Fed’s Powell ordinarily leans, more so, in favor of higher rates. However, context may have ruled supreme, as his comments came on the back of a weaker ISM manufacturing print. It appears that Powell was awaiting the results of the employment report that came out of Friday, and based on the results, he may side with the Fed hawk camp in the end.

The Odds of a rate hike, as implied by the OIS curve, have ticked higher on the week. The odds for a Sep hike have climbed to 53%, and just passed a coin flip, from 47% on Monday. Dec Hike probabilities followed suite as well currently at 77% up from 67% on Monday.

Eurodollar futures came off, as traders got short the curve out to Sep 2016. Uniform selling was present on the short end, as traders continue to weigh the increasing likeliness and timing of the first hike. The 2 yr note, came under pressure finishing the week at 109-12 from the 109-18 highs. On the long end, the 30yr Bond finished up at 158-22 from 156-07 earlier in the week, resulting in some notable flattening. The S&P index finished in the red at 2077, offside nearly 40 handles from 2112 at the beginning of the week. The dollar index edged up to 97.55 from the 96.40 aftermarket lows at the week’s start. WTI crude oil faced steep declines and closed at $43 off of $47 highs. Gold finished the week largely unchanged at $1093 failing to breach the $1100 level. All in all, the reign of the hawk camp strengthened this week, as did the case for rates moving higher sooner rather than later. Last week’s price trends, across markets, may become persist, as the hawkish rhetoric continues.

Next week begins with some important commentary out of the Fed, on Monday: 7:15 Fed’s Fischer (2015 Voter), then Fed’s Lockhart (2015 Voter) speaks at 9:00 and 12:25 again. Lockhart is expected to stick to his recent script. Commentary from Fed’s Fischer may be tougher to call. He has been neutral as of late, so markets will eye any shift in his stance, as it appears that many voting members of the Fed have crossed over into the hawk camp recently. Next week will be tamer, than the last, in terms of incoming data with all eyes on Thursday’s retail sales report.

-David Felkai

Uptick GMA.

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