Various Fed presidents have been yapping the last two weeks about rate hikes. The market is starting to look convinced. Meanwhile, GDP estimates by the Atlanta Fed and New York Fed staff have been sinking like a rock.


Odds Creeping Up

Since Friday, the odds of at least one hike through the December FOMC meeting increased to 74.5% from 69.5%. The odds of two hikes increased from 5.5% to 7.4%.

This degree of conviction seems quite premature given some key reports coming out later this week: Import and export prices on Thursday, and retail sales and producer prices on Friday.

Given there is an asset bubble, the Fed ought to hike, and should have two years ago minimum (assuming of course there is a Fed), but that is not the way the Fed thinks.

But there ought not be a Fed to hike. We would be better served by the free market.

In the absence of central bank manipulation, bonds would not trade with negative yields, toggle bonds would be punished with high yields if they existed at all, and we would not be in the third financial bubble since 2000.

It’s impossible to know what is precisely on their minds, but I rather doubt they believe there is a full blown asset bubble.

Convinced a Hike is Coming?

Given we have seen high odds of hikes in February, March, June, etc., all vanish for one reason or another, I am not convinced.

Two good retail reports and a couple respectable jobs report would convince me.

Currently the GDPNow forecast is 2.1% for third quarter, the FRBNY Nowcast is 2.2% for third quarter and 1.3% for fourth quarter.

Current GDP Picture

  • Q4 2016: 1.3% (FRBNY estimate)
  • Q3 2016: 2.2% (FRBNY estimate)
  • Q2 2016: 1.4%
  • Q1 2016: 0.8%
  • Q4 2015: 0.9%
  • Q3 2015: 2.0%

The Fed has not hiked into such anemic results ever before. Will they now?

The answer is yes, even if we see lackluster retail reports, provided they can convince the market a hike is coming. Lord knows they have tried, over and over.

Mike “Mish” Shedlock