So, the Fed’s influential trio came out to play yesterday; all suggesting that a US rate hike in December remains firmly on the table; but the decision remains very data dependant. At yesterday's testimony before the House financial services committee, Fed chair Janet Yellen stated that current domestic economic conditions are “pretty strong and growing at a solid pace” though the spillover from the global economy has been somewhat of a drag. She went on to say that the committee has been expecting the US economy to “continue to grow at a pace that is sufficient to generate further improvements in the labor market and to return inflation to our 2% target over the medium term”, adding that “if the incoming information supports that expectation then our statement indicates that December would be a live possibility.” Markets were quick to react to Yellen’s hawkish comments, with futures hiking up the probability of a rate hike at the final meeting this year to 58%; from 50% before the statement, and just 33% last month. Treasury yields spiked higher, with the two-year yield racing to its highest level since early 2011.
Yellen did discuss the fact that inflation is running way below the Fed’s 2% target adding that one of the main reasons is the “declines in energy prices”. Incidentally, having peeped above $50 intra-day yesterday, Brent Crude fell around 4% over the day and the dollar rallied 0.82% (measured by the DXY Index); clearly not the most ideal conditions required by the Fed. In fact earlier in the day, vice-chair, Stanley Fischer said “We’re not that far from the 2 percent target, when the price of oil stops falling and when the dollar stops appreciating”. Meanwhile, wage inflation was on Fed President William Dudley’s mind, who reiterated Yellen’s “live possibility” but also added that he would like to see what data shows before confirming a rate rise at the December 15-16 meeting.
Softening growth in China has been of some concern to the Fed after policymakers intervened in the stock market and lowered the renminbi peg against the dollar in August. However, these concerns seem to have abated as the Chinese bourses have rallied into bull territory; the Shanghai composite is up over 20% since the August lows and the offshore renminbi has appreciated over 2% against the strong dollar (which has rallied 3.7% during the same period).
Tomorrow sees the release of US employment data, having disappointed in September, we expect the Fed will be eagerly awaiting the nonfarm payroll print which the market expects will once again come in below 200k; at 182k. The market consensus is that unemployment will fall to 5%, which the Fed read as close to full employment.