During the past month the Fed prepared the markets for an upcoming Fed hike but after the very weak jobs report for May, the market has more or less priced out a Fed hike this summer. Also we think a summer hike is unlikely, see also Flash Comment US: No summer hike , 3 June. Today focus was on Fed chair Janet Yellen, who spoke in Philadelphia, for any clues on how she and the Fed interpret the economic outlook for the US after the nonfarm payrolls data.
Yellen was much more dovish than in her recent speech, as she did not repeat that a hike 'in the coming months' could be appropriate, which supports our view (and market expectations) that a summer hike is off the table. Regarding the weak jobs report for May, Yellen said that it 'was, on balance, concerning' but emphasised that 'one should never attach too much significance to any single monthly report'. As we argued in our flash comment after the jobs report (see link above), sentiment can shift quickly. Last year, the September jobs report was pretty weak, which led us to push our expectation of the initial hike from December 2015 to early 2016 (market expectations were pushed out as well) but only one month after the October report came out really strong and the Fed ended up raising rates in December. Also one has to remember that other economic data such as private consumption, consumer confidence and the housing market have improved. In other words, the Fed needs more data in order to interpret the current economic development in further detail. Interestingly, Yellen said that an 'encouraging aspect' of the jobs report was average hourly earnings, which, looking besides volatility, have begun to trend up.
Although Yellen said that she thinks the positive factors are outweighing the negative, she highlighted the downside risks to the economic outlook. She mentioned that the resilience of US domestic demand should not be taken for granted and that the US still faces risks from the global economic outlook (especially China).
Overall, Fed chair Yellen did not sound like a central banker about to hike, leaving us to conclude that a summer hike seems unlikely. Even if data we get before the July meeting come out better than expected and the June jobs report is very strong, the Fed would probably not have enough time to prepare markets for a July hike. As we have argued previously, most voting FOMC members have a dovish to neutral stance on monetary policy and are unlikely to raise rates too much, too quickly. If data disappoint, they will prefer to postpone the second hike rather than raise rates further prematurely. Currently, we stick to our view that the Fed will hike in September but risks are skewed towards a later hike. If September is off the table, the next possibility seems to be December, as the November meeting is less than a week before the US presidential election.
According to current market pricing, the approximated probability of a hike in July is below 30% and in September it is around 50% (before the jobs report the figures were 70% and 85%, respectively). A hike this year is no longer fully priced in.
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