US data ostensibly argued for a further rate hike if anything - Rabobank

Michael Every, Head of Financial Markets Research at Rabobank, suggests that the package of US data we saw ostensibly argued for a further rate hike if anything.

Key Quotes

“Housing starts were 2.1% m-o-m vs. -0.8% consensus; core CPI was 0.1% vs. 0.2% expected but on a core basis was still 2.2% y-o-y; and even industrial production jumped 0.7% vs. 0.3% expected.

Moreover, we got some fairly explicit Fed-speak. Dudley said that markets were too complacent and that a September hike is possible; Lockhart was more moderate but said he wouldn’t rule out September, and made clear one more hike this year is needed.

In response the Fed Funds futures strip priced in a 51% chance of a move by December vs. 44.8% the day before, but September only rose to 22% from 18%: indeed, with USD slumping, and sticking with Harry Potter for one more day, the market said that Fed braggadocio is either Hufflepuff or Slytherin. Perhaps that’s because while there was once a tradition of the Fed raising rates when the market wasn’t pricing for it, that iteration of the Fed is long since departed? (This current version doesn’t want to disrupt the asset-price inflation it has so carefully nurtured.) Or, perhaps the market looked at the US data in detail and saw that the surge in housing starts was for rental units not family homes; that real earnings only rose a meagre 1.4% y-o-y even with flat headline inflation; and that in y-o-y terms industry remains in recession – in other words all very labour vs. capital ‘new normal’?”