Article / 01 September 2016 at 1:12 GMT

Global Macro: September is the perfect time for a Fed rate hike

Global Macro Strategist [Asia based] / Saxo Bank
  • A US rate rise in September makes sense for a number of reasons
  • One, is it would allow it the option of hiking again in December
  • Another is it would help the Eurozone and Japan to weaken their currencies further
  • Another pro is it would strengthen the much-diluted Fed credibility

By Kay Van-Petersen

Assuming that US nonfarm payrolls holds up this Friday, we touch on why September equals "timing perfection" for the Federal Reserve.

  • Um: Take out the political event risk, on both sides of the Atlantic, both with the US November 8 presidential elections, as well as the Italian Oct/Nov constitutional vote on which Matteo Renzi has staked his political life.
  • Dois: Don’t run the risk of economic data correcting between September and the November or December meetings. Economic data rarely goes up in a straight line for too long.
  • Três: Would correlate well with giving an update on its “Summary of Economic Projections”. Click here for Fed Calendar.
  • Quartro: Would allow it the option of hiking again in December – it doesn't necessarily have to, the market just has to think it might.
  • Cinco: Would help out the Eurozone and Japan (28% of global GDP) to weaken their currencies further, which have been struggling to break to new lows, given the monetary fatigue that we are seeing in the Bank of Japand and the European Central Bank (currencies strengthening post easing moves)
  • Seis: Would strengthen the much-diluted Fed credibility, by showing that yes; it can be decisive, and yes, it can move relatively quickly when it wants to. Rather than the classic academic approach of we first have to get hawkish enough to signal at a meeting that we are going to move, then remain hawkish enough – data dependent, no markets selloff, stars aligned – to hike at the scheduled future meeting.
 Perfect time for hiking ... a rate increase in September would show the Fed
can move relatively quickly when it wants to. Photo: iStock

Fed implied probabilities

  • Have moved up quite significantly over the last two weeks, but we are still too low.
  • September is going to be more than just another "live" meeting. I’d expect us to have a greater than 50% probability of a Fed hike from the current 36%, with December in the 75%-80% from current 60%.
  • I would expect post the Friday NFP number 180,000 estimated – assuming it holds up – a Fed member to signal the month of September specifically in a speech or interview next week. i.e. If there is no specific signalling of September next week, then we could be in for the classic, set-up in September, to hike in December – which makes everyone’s job harder because so many things can go down in Q4 that make it challenging for them to hike in December.

Source: Bloomberg

– Edited by Gayle Bryant

Kay Van-Petersen (KVP) is Global Macro Strategist at Saxo Bank, please follow him on Twitter @KVP_Macro and at SaxoStrats. If you missed this wk’s Macro Monday & the inflection point on the USD & US rates, don’t panic just click Macro Monday Call.

Please join us here live again next Monday at: 08:30 [SG/HK], 09:30 [TOK], 10:30 [SYD].


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