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
If Trump’s chances of winning are believed to be 74.5% (my polling does not put Clinton above 40%) then this number makes perfect sense to me.
If Trump wins, they’ll hike.
What’s your polling Thomas? I’d like to hear about it since all the other polls seem to be useless.
It always puzzled me why on earth should the government borrow from a private bank and pay interest to them where it can coin its own money.
If we can print a dollar bond we can certainly print a dollar currency. Why should those private bankers have the enormous power to print and buy the whole earth without lifting a finger to create any wealth? And when they screw up, still the government has to bail them out, give them money so it can borrow from them and pay interest to them…crazy , isnt it?
To paraphrase Sen. Robert Byrd
“One man’s crazy is another man’s grrrreat!,”
trump administration wants rates higher that way they have cover to default on the dept.china,etc will be forced to take a 70% scalping in exchange for lower tariffs on their imported crap
Mish this is going to b a whole lot of fun to watch-a panic out of bonds,stocks and commodities into the dollar.
Treasuries will kick ass.
You are right about the rest.
The $ can be crashed in an hour or less with a little strategic jawboning by empty suit Fed luminaries. This Fed still has massive credibility to the market upside. They have yet to follow through on much of anything that would say otherwise. It’s a Sucker Show,
“The $ can be crashed in an hour or less with a little strategic jawboning by empty suit Fed luminaries”
Good One!
They have been trying for a couple of years to weaken $US as it has been monkey hammering S&P earnings … to no avail. Currency set in open market and not by hot air of clueless dolts.
Other central banks are “crazier” than Federal Reserve.
Other central banks are “crazier” than Federal Reserve.
Yes, but ours don’t quit. In football, you protect the quarterback. In monetary economics, you protect the bubbles and, by inference your reputations. It’s part stupidity, part self preservation.
And the moderators protected Hillary, who is the next bubble protector. Lawrence Welk would have been in awe if he were still alive.
If Trump wins, yes. He’s a perfect scapegoat in their minds.
Otherwise, are you nuts? Lucy, Charlie Brown, and the football are the permanent metaphor here. Possibly even if Trump wins, No heroes on this FOMC. Part coward, part educated far beyond their intelligence. Stupid, yet mathy. No bubbles here. Keep moving.
“even if we see lackluster retail reports,”
…
econoday –
“Same-store sales were up 0.5 percent year-on-year in the October 8 week, a slowdown from the prior week’s outsized 1.3 percent year-on-year gain but still above the sluggish pace seen in most weeks since mid-August. Month-to-date sales in the Redbook sample were down 0.2 percent from the prior month, however, extending a long string of consecutive negative readings in this comparison that began in the June 4 week. Year-on-year, monthly same-store sales were up 0.5 percent, down 0.1 percentage points from the previous week.”
http://mam.econoday.com/byshoweventfull.asp?fid=471711&cust=mam&year=2016&lid=0&prev=/byweek.asp#top
…
Sloppiness on the part of Thomson Reuters … why you should always read reports first hand rather than rely on a flunky’s interpretation:
“The Thomson Reuters Same Store Sales Index registered a 0.3% increase for September, beating its -0.3% final SSS estimate.
Among discounters, Costco posted a better-than-expected 1.0% SSS.”
…
The story on US retail sales … if you read the Costco report, US comparable sales 0.0% … total (includes international) comparable sales were +1.0%
http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-newsArticle_Print&ID=2209638
oops. Left out Reuters link
http://lipperalpha.financial.thomsonreuters.com/2016/10/september-saw-positive-retail-surprises/
Personal opinion? Odds or not, I believe it depends more on the election than on anything else. Fed is politicized, just like all the so-called “independent institutions.”
Use your common sense.
Haven’t you seen the same pattern over and over again? About 6-8 weeks outside the FOMC decision the rate hike looks practically locked in.
Then a couple weeks outside the decision – something turns sour and it gets pooh-poohed.
I told you before….they can’t raise the rates (to any measurable degree) without bringing down the house of cards.
At these odds if I were a betting man I’d quadruple down on no hikes in December.
To me it’s common sense.
What if Trump wins…as others have mentioned (and as hillary signaled in the debate), they’ll want to bring down the economy and then blame The Trumpening as the downfall of civility. No?
Absent a bombshell scandal dropped on Hillary by some third party – at this point Trump doesn’t have a snowball’s chance in hell. The media and the establishment (Big Money) have chewed him up and spit him out. They’ve finished him off. He never had a real chance from the start. Hillary was next in line. She will be crowned President. If you think the voters actually decide who moves into the White House I know somebody with oceanfront property in Arizona for sale.
Wash, rinse, air dry – repeat the cycle.
However, if Trump miraculously slipped through the cracks (he won’t) you’re probably right. They would sabotage him one way or another – or even pull a JFK on him.
My guess is that after what Trump has seen through his eyes in the last 2 years he’s not really interested in becoming President. Because he knows at that point his troubles would only begin. So he’ll shove it into neutral and ride it out from here on in for show.
Why would he put his family through torture?
….but, but, but, but…. if the British vote to emancipate themselves from fascist Brussels, the entire global financial system will collapse in seconds!! All the academic models say so!
The sky will fall, the horsemen of the apocalypse will ride, and the world will cease to be by June 2016 (months ago)! Every media outlet has quoted every insider oligarch… I mean expert… telling us so!
You must “respect my authoritah” (Mish blog doesn’t allow the obligatory youtube link)
Do the math.
Let’s say the rates are increased to a mere 5%. Below the historical average norms. Based on the current Federal debt – what percent of the current federal budget would be required to simply cover the interest on $19T?
Is that sustainable?
You need to check your math there old timer. Your absurd claim that 5% is somehow “normal” or even the historical average is just plain wrong.
If you had done any research at all, even a cursory glance at a long term chart on FRED (St Louis Fed offers free interest rate charts) — you would see that 5% was an anomaly. Check every single year before 1978.
You obviously don’t know what you are talking about.
As to your ignorant suggestion that the federal government can’t afford to pay 5% (if that were the historical average) — that is just your attempted spin on the real story that the federal government is already bankrupt.
A more accurate statement is that the government can’t afford NOT to raise rates — because old people vote and they won’t be able to collect their pensions, annuities, insurance policies or anything else. Every retirement plant in the country (MILLIONS of votes) has the underlying assumption of 6-8% total return. With a 60/40 stock/bond portfolio, that isn’t going to happen with bonds paying less than 2%.
The US government is going to default on something — maybe debt, maybe retirement, definitely geopolitical obligations.
You have to look at both sides of the balance sheet, otherwise you make yourself sound stupid.
If anyone in the US thinks they are going to retire under ZIRP or even 2% Fed funds rate — ignore oldtimer and do some actual math.
Most pensions, retirement plans, etc are 60/40 plans (60% stocks, 40% bonds). That is a rough average, but its remarkably close to reality, and it is is what many pension advisories recommend to boards that don’t want to get sued for financial malfeasance.
Stocks supposedly return 8% over the long term. Multiply that by 60%, you get 4.8%.
So if your retirement plan assumes 7% total return, the 40% bond portion has to earn the balance 7% – 4.8% = 2.2% for the bond part. 2.2% / 40% means the bond portion would have to get 5.5% for the US government to avoid ‘social chaos’ of baby boomers starving while rich public servants tax them to death.
Obviously stocks do not return 8% every year (simple reversion to the mean suggests they will return less than that for years to come). Even if they returned 8%, bonds would have to yield 5.5% to make a 60/40 retirement portfolio solvent.
Many pensions and retirement plans assume a total return higher than 7% — so their situation is much worse.
LDoldtimer likes to talk smack, but does he really think that a default on every retirement in the land is sustainable?
Therein lies the disaster that Bernanke / Yellen have created for the US. Interest rates must stay low ***IF*** (and that is a big if) the US government is going to avoid shrinking as a percent of the economy. At the same time, interest rates must be much much higher if the US government wants to avoid defaulting on retirement promises and social chaos that results.
The US government has a very very big problem no matter where the Fed puts interest rates. They are damned if they raise rates and damned if they don’t.
Too bad you can’t connect the dots on your own LFoldtimer.
Yellen isn’t clever enough to engineer boiled water. Whatever happens, it is no longer under the Fed’s control (or the ECB, and it should be really obvious by now even to the doubters that the Bank of Japan has lost it too).
My guess is Yellen is trying to figure out how Bernanke left her holding the proverbial bag — but in every movie script, the crime boss always tries to skip town leaving his deputy to face the angry masses.
Lowered interest rates were a temporary emegency provision of the bail out. If we have to fret over 50 basis point, in my book, the emergency is still in effect.
Most consumers have to deal with credit card rates well into double digits. ZIRP doesn’t apply to GNMA mortgages or small business loans.
It is pretty funny how many financial professionals are terrified by 50bp or (gasp!) even 1% rates.
I think market rates are going much high, and the FED will be forced to follow. What I saw today in the markets was ALL asset classes down, EXCEPT cash. This is the second time in over two week I’ve seen this dynamic, and it leads me to conclude a liquidity crisis has started.
FED: SEVERAL OFFICIALS SAID DECISION TO WAIT WAS ‘CLOSE CALL’
Has anyone kept track of how many “close calls” they’ve had in the past eight years? I’d love to know.