At face value, Janet Yellen and her colleagues at the Fed have been sending a strong message to markets that they are about to raise rates. Traders now believe the only possible reason they won’t hike is if US data slows unexpectedly.
So markets are on tenterhooks watching the data and waiting for the release of US non-farm payrolls tonight.
But Roger Bridges, Nikko Asset Management’s Sydney-based global rates and currency strategist, says the combination of Britain’s EU referendum on June 23, no Fed press conference after the July meeting, continued easy monetary policy around the globe and a run of relatively poor US data the Fed won’t be able to tighten before the September meeting at the earliest.
His take isn’t the Nikko AM house view, but it’s one many traders and commentators will find accessible.
Bridges says the market misread the intent of the Fed’s recent hawkish rhetoric. Rather than signalling the imminence of a rate rise Bridges says, “the market had very low probabilities of future rate hikes and the Fed wants to keep its options open by making every meeting ‘live’. This implies that it is at least trying to ensure the market is pricing a greater than 50% probability of a potential rate increase”.
Interestingly, possibly disappointingly to the Fed, the June Fed funds contract has only a small chance of a Fed tightening priced in while only July contract as a greater than 50% chance with its close at 99.455 (0.545%) overnight.
Bridges says events offshore are still constraining the Fed. And any “rate rise will rely on US economic data either improving or at least maintaining its current level”.
That means tonight’s non-farm payrolls is still a huge event for traders who see the strength in the labour market as the key driver of the Fed’s decision to raise rates, or not, in the month’s ahead.