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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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