I frequently check CME Fedwatch for a look at market expectations of rate hikes.
When expectations rise, I typically laugh.
Given all the analysis on stunning job growth, inventory builds, Fed pontifications, and other drivel, interest rates ought to be at least 1% by now.
But here we are. Rate hike expectations are sinking fast … again.
This evening, just for grins, I decided to check what market participants thought of rates hikes.
The much touted “September rate hike on the table” message is now dead on arrival.
OK, but when?
The market now believes the next rate hike will be in June of 2017, pushed back from May yesterday and March following the last jobs report.
That’s easy, but Fed presidents, mainstream media, and economists in general still haven’t figured it out.
Here’s the answer in a nutshell: Every good economic report is invariably followed up with an equally bad if not worse economic report.
Excuses have been endless: China, Brexit, Jobs, GDP have all come into play.
Given two allegedly excellent jobs reports back-to-back, the September hike thesis was “surely” in play.
That notion lasted from the jobs report on August 5 until the August 9 BLS admission Productivity Declines 0.5%, Down 3rd Consecutive Quarter, Longest Losing Streak Since 1979.
Real Wages Decline
Buried deep in that productivity admission was this little tidbit from the BLS.
“Due to a 4.7-percentage point downward revision to first-quarter hourly compensation, unit labor costs decreased 0.2 percent in the first quarter of 2016, rather than increasing 4.5 percent as reported June 7. Real hourly compensation decreased 0.4 percent after revision, rather than the previously-published increase of 4.2 percent.”
Fancy that. Despite huge minimum wage hikes, wage earners are still losing ground.
One day ahead of the productivity report, the Wall Street Journal posted an article entitled “Voter Discord Isn’t Over Wages“.
I commented on that notion ahead of the productivity report in Is Voter Discord Over Jobs and Wages? If Not, What?
My conclusion was “People may cite race relations, police attacks, security, etc., but those concerns have their roots in something else: a feeling of slipping economically behind over a decade or longer, as the rich get richer and richer.”
One day later I offered this recap: Pocketbook Theory – Mish vs. Wall Street Journal.
Please take a look.
Rate Hike in September?
For the Fed to hike in September, the data between now and then better be uniformly positive. Even then, it’s not a slam dunk given that horrendous productivity report.
To put it mildly, don’t count on it.
Mike “Mish” Shedlock
Only low IQ people believe whatever the government or its handlers behind the curtain publish or say. Everything is rigged as Trump would say. We’re living in an alternate universe where the free market is no longer free; captured behind the walls of a fascist police state. Invest in tangibles; paper promises are for suckers.
I’d put the chances of a rate hike in September in the same league as the Yankees making a comeback and winning the 2016 World Series,
The scammers know that they’ve pushed up right up against the edge at the tipping point. One little tweak in the rates could be like a sudden gust of wind. Just enough to push Humpty right off the wall.
Never happen. They’ll continue to kick the can until they can’t anymore.
Eddie Ip said:
Thank you very much for posting your analysis. I find it simple to read but very insightful. I think what you said implies the markets don’t trust the fed and the government because they don’t have any more creditability.
Eric Coote said:
There is probably a lot more printing to do to counter deflation before any rate hike becomes possible, if ever.
A reset is inevitable – one day.
Perhaps that will be a new paradigm – required to enthral the cackling commentators and ensure continuation of secret (priestly) privilege. Pokemon to the rescue?
Eric Coote said:
Here is the dilemma in Australia on the same subject. Quote from a speech by Glen Stevens (retiring Reserve Bank Governor) as reported by the Daily Reckoning’s Gen Canavan today – https://plus.google.com/+GregCanavan/posts
‘…the most powerful domestic expansionary impetus that comes from low interest rates surely comes when someone, somewhere, has both the balance sheet capacity and the willingness to take on more debt and spend. The problem now is that there is a limit to how much we can expect to achieve by relying on already indebted entities taking on more debt. So for policymakers looking to use low interest rates to boost growth, the question is: which entities, if any, in the economy can accept higher leverage safely?
‘In some countries there may be no safe way of borrowing and spending because debt, both public and private, is just too high. In Australia, gross public debt, for all levels of government, adds up to about 40 per cent of GDP. We are rightly concerned about the future trajectory of this ratio. But gross household debt is three times larger — about 125 per cent of GDP. That is not unmanageable — but nor is it a low number. It’s an interesting question which sector would have the greater capacity to take on more debt, in the event that we were to need a big demand stimulus.’
Just wishing there was Someone – somewhere!!! For now will the Australian Government do? – until zero rates can lower the leverage risk 🙁
That gov does not completely understand the issue. There are 2 kinds of people they want to have spend more money: the ones he identified that do not want to take on any more debt, but there are also the other people who do not need to borrow any money, they have plenty already and do not wish to spend more than they are already spending. Either way, the low cost borrowing plan does not work.
I should add that while I mentioned “people”, the same thing applies to businesses. Businesses that are willing to borrow low cost funds just use them to buy other companies or buy back their own stock. Neither one really helps the economy.
Maybe its hard to convince the market of rate hikes because they never actually seem to get around to hiking rates.
Diogenes of Sinope said:
Moreover, if they did actually put in a rate hike or two, people would be listening fast and hard to every syllable these bankers were to ever utter.
No convincing required, seeing is believing and we’ve seen the last of a normalized rate environment.
Central banks react to the markets, not the other way around.
Timothy ODonnell said:
Mish, you forgot to mention the most frequent excuse for bad economic reports ….the weather.
David A said:
The weather…. ergo caused by your SUV, therefore give me (goverment) more money.
(DAMM,tails you loose, heads I win, again)
The Fed can’t hike when other G20 Central Banks are still easing.
Brian E Considine (@e_considine) said:
2. check is inflation increasing or not? If yes goto 3, if no goto 1
3. Stop stimulating.
It is just that easy. The rate hike should come when the answer to #2 is yes. Good economic news like more jobs or slight wage gains are just that. Good news. It doesn’t mean #2 has become a yes.
Ron J said:
“Real hourly compensation decreased 0.4 percent after revision, rather than the previously-published increase of 4.2 percent.”
But health care insurance rates will be going up X%, despite the downward revision of hourly compensation.