Article / 11 May 2016 at 10:00 GMT

Weekly Bond Update: Jingle bells before rate hikes

Fixed Income trader / Saxo Bank
Denmark
  • June rate hike off the trajectory after disappointing NFP
  • December looks to be most likely for next move in cycle
  • Brexit, November US elections all legislate against earlier move

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Wary pedestrians navigate their way through New York's Times Square on a cold Christmas morning and it might take that long before we get the next rate move. Photo: iStock


By Michael Boye


As a long-held proponent of a defensive rate hike approach from the Federal Reserve (here, here and here among others), you won't be surprised to learn that we think the US central bank (despite all its agressive rethoric) will not be in a hurry to hike interest rates this year. In fact, we think its more likely that we will be hearing jingle bells before we see any further interest rate hikes in the US.

Here is a run-down of the rest of this year's FOMC meetings, and the event risks which could likely force the Federal Reserve to keep its finger away from the trigger.

June 15 (press conference) Currently priced at an 8% chance

A dissapointing nonfarm payrolls last week seems to have been the last nail on the coffin for any June hike aspirations, even though we think, that with a potential (at least in the short term) earth shattering British parting with the European Union one week away (June 23 election date) a rate hike here was always a long shot. Spanish King Felipe has also called for Spanish elections on June 26, and while there is no iminent pressure on the Eurozone periphery in general, the political uncertainty is lurking beneath the surface with Catalonia seemingly on the look-out to voice its independence call at the sign of any weakness in the detested Madrid administration.

July 27 Currently priced at 23% chance (cumulative)

The July meeting has no scheduled press conference, and while Janet Yellen has reassured investors, that non-press conferece meetings are just as much in play for rate hikes, the market seems to have a preference for the already planned dates. Furthermore, making the timing more difficult albeit not impossible is the holiday-stricken nature of financial markets at this time, in which the markets are notoriusly less liquid and thus more fragile to event shocks. Yellen's approval rating among money managers certainly won't see a boost, if rates are hiked when the entire industry is sipping warm-weather cocktails pool-side. Not that she may care, of course. What could likely be weighing more on her mind, is the Greek debt debale, which may have re-ignited at this time, as the Greek government is currently pushing hard for a debt relief ahead of July 20 repayments to the European Central Bank.

September 21 (press conference) Currently priced at 35% chance (cumulative)

With the markets working at full steam again, and with the Brexit decision (and potential Greek debt crisis version 57) in the rearview mirror, the September meeting provides the first and biggest chance of a rate hike this year in our view. In line with the mantra of data dependency, the US data numbers will have a big say, and given the recent dropback in economic data strength, it will require a reversal in the economic sentiment to warrant any action here. Furthermore, with the US in election campaign mode ahead of November 8 presidential elections, it is perfectly conceivable that investment-related figures will show some hesitancy especially if polls begin to point in the direction of a more equal heat.

November 2 Currently priced at 38% chance (cumulative)

A controversial decision from the Federal Reserve just six days before the presidential election would be almost unimaginable - in fact, it would almost make you wonder if it forgot to cross-check calenders when planning this meeting. With her job seemingly already on the line, a surprise rate hike days before the election wouldn't likely be career promoting for Yellen.

December 14 (press conference) Currently priced at 53% chance (cumulative)

This leaves us with the December meeting as the most obvious date. It even has a scheduled press conference as well. However, by this time, no one knows the present shape of the global economy, let alone the US economy. The Chinese economy is clearly slowing already, as confirmed by this week's trade numbers, and the migration crisis in Europe could, at least in the short term, be a serious drag on public finances.

Finally, with the rest of the world's central banks easing monetary policies, the Federal Reserve would actually — on a relative basis — already be tightening its policy. Just by doing nothing.

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There's not a money manager in the world who'd welcome a rate rise in July. Photo: iStock

— Edited by Martin O'Rourke

Michael Boye is a fixed income trader at Saxo Bank

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