While the odds on a Fed rate hike are still vacillating, the strong jobs report, and recent market action are now forcing the Fed’s hand. The Fed needs extreme market conditions to justify not hiking. The point has arrived where stock and bond markets are strong enough, even with the prospects of a hike, that diminished Fed credibility should outweigh any benefits of pausing.
Stanley Fischer clearly outlined the need to hike ahead of not only inflation, but inflationary expectations. The August Employment Report was a key data set before the Fed meeting. The headline jobs number was soft at +173k jobs but all other aspects of the report were notably strong:
- July payrolls were revised +30k higher (to 245k)
- June payrolls were revised ++14k higher (to 245k)
- The unemployment rate fell to 5.1%
- Average hourly earnings grew faster than expected +0.3% vs. +0.2% consensus
- Average hourly workweek was longer than expected 34.6 vs. 34.5 consensus
How sustainable will the recent market strength be? The driver that derailed markets and sentiment has been China. The China government is buying its own stocks still (to an unknown degree) and the government is certainly talking up the markets to the investing public. Aside from the point of sustainability (this isn’t) the markets are moving now, maniacally higher, into the Fed meeting. Animal spirits are back in Asia and spreading quickly.
The resolution of global risk appetite will come with earnings from audited US companies, that file with the SEC. The extent of the slowdown in China/EM will be discussed on third quarter earnings calls in October. The impact to multinationals will help to resolve the “realness” of the current global scare. But this event arrives after the Fed meeting, and so, the Fed is likely to hike rates by 25 bps on September 17th.