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Equities got a lift from comments made last night by Federal Reserve Chairman Janet Yellen. One of the main takeaways was her subtle change of words concerning future rate hikes. Just over a week ago Mrs Yellen said she expected interest rates to rise "in the coming months” whereas yesterday (post-payrolls) she said that rates probably needed to rise gradually “over time.” As far as investors were concerned that pretty much took the probability of a June rate hike down to zero. It also reduced the likelihood of the Fed hiking in July, although the possibility of a September rise has increased. The latter point is worth noting as a rate rise in September would be controversial, coming so soon before the US Presidential Election.
  
Also, Mrs Yellen described Friday’s US Non-Farm Payroll report as disappointing. However, she insisted that overall the labour situation was quite positive. This is somewhat surprising as it is generally understood that Mrs Yellen pays close attention to the Labour Market Conditions Index (LMCI). This is an index compiled by the St Louis Federal Reserve which looks at 19 separate job indicators. We have just had an update on the index and it fell 4.8 in May. Not only was this its largest month-on-month fall since 2009, but it was also its fifth consecutive decline.
  
As we can see from the chart below it is currently below zero and falling. A decline of this magnitude below zero has often preceded a recession, as indicated by the vertical grey bars. This should be a big red flag for the Fed.
  
 PM Bulletin  
  
Now members of the Fed have been repeating the mantra of how monetary policy is “data-dependent” for quite a while now. And of course maximising employment and maintaining price stability (inflation) are the pillars of the Fed’s dual mandate. So does it really make sense for the Fed to raise rates again given the deterioration in labour market conditions and the declining payroll numbers?
  
I would think the Fed will be happier to stand aside in both June and July and wait to see how the jobs data continues to pan out. That means September is in play. But personally I can’t see the US central bank wanting to tighten monetary policy until they see the LMCI tick up and Core CPI print over 2% for a few months running. So that could move things out to December, after the election. If that’s the case (and it’s a big “if”) then this should weigh on the dollar once we get past this month’s referendum.
  
Quote: I would think the Fed will be happier to stand aside in both June and July and wait to see how the jobs data continues to pan out.
  
Disclaimer:
  
Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Category: PM Bulletin


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