Fight the Fed
Fed speak has generally remained on message, with several speakers contending that the September meeting was almost too close to call and that rate hikes this year remain the base case for the committee. Investors, however, are having an increasingly difficulty time believing the Fed — effectively fighting the Fed in the futures market and the shape of the curve. Last Friday’s disappointing non-farm report further complicates the rate hike process; calling into question one of the few lynchpins that supported what now seems like an aggressive move this year. Of course one data point does not make a trend, although the report did highlight the challenges of posting monthly gains of +200k as we approach full employment. The weak report therefore provided additional support for pushing expectations further into the future, which is what the market has effectively done; with the odds of an October hike at just 8% and the hopes for a December hike diminishing to under 40%. Since the report, we have heard from a number of Fed speakers, but only Williams and Bullard have commented on the potential for hikes, citing again that all meetings are live. Given the current Fed’s proclivity to avoid market surprises, we would need to see fairly firm statements on the prospects of an October hike in order to begin considering this a potential market concern. Similar to the September meeting, the lack of policy communication was/is probably the most telling data point. For our part, we moved our expectations to March, 2016 based on the higher importance that we see the Fed placing on international developments.