Tag Archives: US economy

US interest rates: Ignore the scaremongers, non-farm payrolls aren’t enough to derail Yellen

When Janet Yellen speaks in Philadelphia later today, everyone will have just one question on their minds – when will the US Federal Reserve next raise interest rates?

Fed members had been hinting at another rate hike over the summer, but equities are today trading higher – and the dollar is weaker – in anticipation of no change over the summer months, following last Friday’s highly disappointing non-farm payroll (jobs) numbers.

Official data on Friday showed that the US economy added 38,000 jobs last month – the fewest in more than five years – which pushed back expectations of a rate rise until later in the year.

But NFP data is a very small part of the story – and Fed chair Yellen knows it. The surprisingly low figure has been seen as an anomaly by some market commentators, contrasting with broader signs of a US economic recovery.

“Something about the NFP numbers don’t add up for me, when you compare them to more positive recent data such as regional reports from the Beige Book,” said Kully Samra, managing director of Charles Schwab in London.

“Two Fed members have already implied that the figures were an anomaly and I expect Yellen will do the same. I don’t think the NFP data would change the stance of the Fed.”

Perhaps a bigger factor in the expected no-change result at the 15 June meeting of US policymakers is the imminent risk of Brexit, ahead of Britain’s EU referendum vote on 23 June.

“I was amazed as to the degree of importance the Fed puts on the EU referendum,” said Samra. “It was mentioned in the minutes of the last meeting due to its potential impact on the global financial markets.”

Augustin Eden, research analyst at Accendo Markets, agreed. “Suffice to say that a US rate hike seems unlikely either in June or July given the iffy print and added headwinds provided by an intensifying Brexit whirlwind,” he said.

“[But] there remains an outside chance the FOMC will act despite the dire jobs number – it was after all just one number – since to do so would at least signal that US economic conditions are right and that the Federal Reserve is not hiding anything from us.”

While a rate rise now looks more likely later in the year, this should not simply be put down to the NFP number and certainly does not mean the US economy is doing badly. It’s actually faring pretty well, the Fed just needs to convince the markets, as Samra explains.

“There is a difference between where the Fed and where the market wants rates to be,” he said. “Rates have been low for so long and there is a disparity about how strong the economy is.

“It’s all about the consumer – they’re at the heartbeat of the domestic economy,” he added. “Data shows they are continuing to spend and they’re slowly borrowing more. The US is the strongest developed economy. It’s forecast to grow at well over two per cent this year.”

Good news! The US economic revival is definitely on its way

This week, Mike van Dulken and Augustin Eden from Accendo Markets tell Hot Commodity why the US is on the up…even if the rest of the world isn’t.

Equity markets went to town yesterday on positive US data and hopes of more stimulus from the European Central Bank (ECB) and China’s People’s Bank of China (PBoC). Yet this is surely supporting the case for the US Federal Reserve to deliver further interest rate hikes this year – something likely to stifle US growth.

So was the market reaction simply increased confidence in the US economic recovery, coupled with a realistic belief the Fed won’t dare hike this year for fear of a repeat of January’s volatility? This should maintain a nice accommodative tilt to global monetary policy to spur economic recovery elsewhere.

US interest rates have risen only a touch to regain 0.5 per cent and equal the historic lows of its peer across the pond – the UK’s Bank of England (BoE). However, US macro data has blown too hot and cold since then for the Fed’s Federal Open Market Committee (FOMC) to be comfortable hiking again anytime soon. Mixed Fed chat of late, with some quite noticeable changes of heart by long-term committee hawks (Bullard), adds to our belief.

With markets already building up to Friday’s US Non-Farm Payroll numbers, it’s worth noting that jobs data has been anything but a worry for the Fed for a good while now, with net monthly additions averaging around 225,000 since 2013. Unemployment at 4.9 per cent remains in a downtrend towards 10 year lows, but wage growth is still lacking.

News that US Q4 2015 GDP growth was revised up to one per cent quarter-on-quarter from 0.4 per cent last week was welcomed by markets, but it still showed a slowdown from previous quarters.

US Consumer Price Inflation (CPI) expectations have also faded quite dramatically (just 1.4 per cent for the next decade, suggestive of another oil price plunge), and sit way below the Fed’s two per cent target. Core CPI figures (excluding food & energy) may have accelerated back to target but for this to hold up oil prices must fall no further, allowing the influence of their 2014 price plunge to dissipate.

So aside from the fact that Friday’s US jobs figures are sure to deliver the traditional monthly market volatility, for us it will only serve to bolster confidence in the US economic revival. Good news. This in turn may further support the case for policy normalisation, but it’s not going to be enough for the Fed to consider the stars truly aligned for another press of the big red button. Even better news for risk appetite. Enjoy the first Friday’s usual fun ‘n’ games, but other data is far more important.

This commentary was provided exclusively for Hot Commodity by Accendo Markets: www.accendomarkets.com.