March 16

Can FOMC Be Patient on “Patience”?

Broad market consensus currently says that the Federal Reserve will remove the term “patience” from its statement at this Wednesday’s FOMC meeting, effectively making the June meeting live for an interest rate hike. Eurodollar futures currently show that there is a 20% chance of a June hike, up from 18% on Friday but down from 23% a month ago. Fixed income markets have consistency under priced the Fed’s projections for rates, trading with a dovish tilt due to an understandable air of pessimism on inflation and the economy.

This pessimism has grown in the last few days as a swathe of economic data has come out below estimates, alongside a huge rally in the Dollar sparked by the start of the European Central Bank’s bond buying program. Last week’s retail sales numbers came out at -0.1% on the core reading, vs an estimate of 0.6%. Core PPI was also way below the expected figure of 0.1%, showing an actual print of -0.5% mostly due to declines in food prices. University of Michigan Consumer Sentiment was worse than guessed, showing 91.2 vs 95.6 estimated.

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Today’s data was also negative with Empire manufacturing, industrial production and NAHB Housing Index all missing estimates. Numerous economic excuses have been tossed around for a few weeks now, namely the West Coast ports strikes and Winter weather. These risks may be real, but at a certain point we have to consider that there is a slowdown occurring throughout the U.S. economy which could be attributed to a number of factors. The US Dollar’s sharp rise is putting pressure on exports, with the WSJ pointing out the impact on today’s industrial production numbers that missed the mark.

The fact that every non payrolls economic number has been declining  for three months now cannot be swept under the rug due to weather or any other one off issue. The United States is especially vulnerable to the slowdown in the oil & gas industry, as well as the massive rally in the exchange rate. Given the recent breakouts in the US Dollar and oil, the Fed may do well to be cautious as the market currently sees Yellen and company on autopilot towards hiking rates, with the first step occurring this Wednesday.

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