MorningWord 6/1/16: I know What You Did Last Summer

by Dan June 1, 2016 9:57 am • Commentary

Last month, the Fed floated a June raise trial balloon. On May 16th, expectations for a June hike sat at a 4% probability. After the trial balloon they shot up to a 34% chance by May 25th.

Now Fed Fund futures are going the other way for the upcoming meeting and shifting their focus to July. From May 16th to today, the probability of a July raise has gone from 19.5% to 49%. That’s coin-flip territory. And there’s historical precedence with that 50% chance. According to research by Goldman Sachs (cited by

History suggests that some 90 percent of rate hikes over the past 25 years already were highly anticipated by the market, with at least a 70 percent chance discounted in, according to research Goldman Sachs released this week.


Goldman found that going back to 1994, 90 percent of the 31 rate hikes were priced in at least 50 percent 30 days ahead of the FOMC meeting. Getting closer to the meeting, the median hike was 95 percent priced in, with only a few deviations, such as from the Alan Greenspan Fed in March 1997 and November 1999.

In hindsight, a June raise (which would have been only the second in ten years, and the first since December) was born into a grave with global growth data remaining volatile and fragile. Potential speed-bumps litter our economic roadways. From the surge in oil into OPEC’s upcoming meeting, the ECB meeting tomorrow, obviously the mid June FOMC meeting, to the late June Brexit vote, China’s weakening currency and an election cycle in the U.S. filled with major repercussions.

And more on that global growth data. Overnight, May manufacturing data disappointed cross the entire planet. Per Markit Economics:

Caixin General Manufacturing drops to 3-month low of 49.2 in May (April: 49.4)

Nikkei Manufacturing falls to 40-month low of 47.7 in May (48.2 in April)

Manufacturing falls to 3-month low of 51.5 in May (51.7 in April)  New export order growth at 16-month low; input costs fall at weaker rat

Manufacturing downturn in intensifies in May as falls to its lowest level in 7+ years

So for those who fear rate increases this Summer as an impediment to risk asset prices rising, remember there’s still a chance of a repeat dovish stance by the U.S. Fed, with more sovereign debt finding its way below the zero interest bound and central banks desperately searching for new and improved ways to stimulate growth, or at the very least avoid a risk asset crash like we saw last Summer.

In many ways with the S&P 500 (SPX) almost exactly where it was at this time last year, but with most global equity indices far lower, the set-up for a Summer swoon this year could make last August look like a day at the beach.