BNY Mellon Weekly Fixed Income Market Commentary

A Question of September or December

The waxing and waning regarding the Fed’s next move continues, with the monthly jobs report pushing odds of a hike by year end to just over 40% at last reading. We shall now count ourselves in the camp that thinks the Fed will hike during the December meeting, as the employment data will provide the FOMC comfort on the continued expansion on the employment front. The internals in the jobs report also supports the Fed’s contention that wage pressure will build as we continue to push forward towards full employment, while the expansion in the unemployment rate was welcomed as it was accompanied by an increase in the participation rate. Economic indicators also continue to surprise to the upside, although its pace has slowed from the higher levels posted in June and July. These surprises have fed into 3Q:16 forecasting tools, with GDPNOW showing a 3.7% expansion, while the NOWCAST report stands at 2.6%. While the weak 2Q:16 GDP reading remains in the back of our mind, the stable economic data and expected inventory adjustment should show limited impact on the U.S. economy post-Brexit. Our view on the Fed is heavily influenced by our belief that the Fed wants to continue the normalization process, even if normalization indicates only one rate hike per year. The ability of the BOE to influence markets with its rate cut at the beginning of the month without going into the negative rate territory illustrates the flexibility that Fed hopes to obtain. There is certainly no lack of arguments for the Fed to exercise patience, although we will side with its desire to firm up its policy tool box as a reason to expect a hike by year end.

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