Inflation has turned up in the U.S, but not quite enough for everyone to agree that rate hikes are needed. The Fed, however, is convinced. They more take the stance that the economy can handle higher rates than the idea they are needed but until recently, the market did not agree. Probabilities of a rate hike based on Fed funds futures were in the 30% range for December as little as 3 weeks ago. They crept up each week and after the last CPI shot up past 70%
The last read on Consumer Price Index data was the August reading released in mid-September. The year-over-year non-seasonally adjusted Headline CPI came in at 1.94%, up from 1.73% the previous month. Year-over-year Core CPI (ex Food and Energy) came in at 1.68%, down slightly from July’s 1.69% reading. Finally approaching 2% again, the market started to believe.
Then on Friday, payrolls happened. Headline non-farm payrolls fell 33,000 leaving us with the first negative payrolls number in 7 years. As expected and also because it’s true, the fall was blamed on hurricanes Harvey and Irma. Contrary to this, however, the unemployment rate fell and wages increased. The unemployment rate hit a more than 16-1/2-year low of 4.2 percent (with an increased participation rate) and annual wage growth accelerated to 2.9 percent. Drilling down to the details of the above figures:
• Participation rate 63.1% vs prior 62.9%
• Avg. hourly earnings 0.5% m/m, est. 0.3%, prior 0.2%
• Y/y 2.9%, prior 2.7% est. 2.6%
This is all Janet Yellen needed to push forward with the schedule of rate hikes they have been warning the markets about all along. Bill Gross from Janus Funds called a December rate hike a “slam dunk” after the release of the data. This means a stronger dollar, lower gold and silver, and possibly a stock market correction. With this kind of data and the hurricanes providing cover for any headline disruptions, Bill Gross is right. We also currently have odds for an additional rate hike in March of 2018 rising from 2.8% on September 5th to 34.4% on Friday. Being data dependent means you need to have data you can depend on. The Hurricanes provided enough cover on the headline figures to convince the market the data calls for a hike. Or two….