It’s Fed week. What will the world’s most watched central bank do? A surprise hike like Canada and Australia? Unlikely. Maybe time to hit the pause button and take a look around? That’s what markets are pricing in. Or will this be a ‘hawkish skip’ implying their work is not yet done? From mine, if we see Core CPI anything above 5.0% this week – the Fed will tell us their work is not done. Here’s the thing: markets are trading back at levels before the Fed commenced their 500 bps of rate hikes. What’s more, we find Core PCE still above 5.0%; unemployment well below 4.0%; and wage inflation above 4.0%? What is to stop the Fed from finishing the job? Whilst they are likely to pause – there are more hikes ahead
"Interest Rates / Bonds"
Bond Market Agrees with the Fed
Two months ago – the bond market was at odds with the Fed. Fixed income markets felt the Fed were going to be forced to cut rates as many as three times this year. For e.g., the gap between the US 2-yr yield and the Fed funds rate was in excess of 100 basis points. At the time I questioned who would be right? Bonds or the Fed? Fast forward to today and the gap has closed considerably… bonds have now realigned with the Fed’s way of thinking; i.e. expect higher for longer
Market Cheers ‘Strong’ Jobs Report
Payrolls rose 339,000 for May. That was well above the 190,000 expected – and what seems like a robust report. Is the economy really that strong? The devil is always in the details. From mine, I think the Fed will likely pause on a rate hike this month despite the so-called ‘upside surprise’. For example, there is some ‘soft’ data in the report – soft enough for the Fed to not pull the trigger. Wage growth slowed and the unemployment rate ticked higher. Good news from the Fed’s lens.
Ignore the Debt Ceiling Noise
Mainstream media remain fixated on ‘debt ceiling’ negotiations – warning of a “financial catastrophe” if this doesn’t get done. This is the 78th time we have hit the so-called debt ceiling. And how many defaults has there been? Zero. A deal will get done. And if we are presented with a sell-off in markets – then it represents an opportunity.
For a full list of posts from 2017…