In case you missed it before your holiday weekend sign-off, the August non-farm payrolls came in below expectations at 151,000 jobs added (vs 180,000 consensus), well below the 2016 average of 182,000 and well below the 2015 monthly average of 229,000:
This was just the sort of print that gives the Fed cover to hold off on raising rates in September. Fed Fund futures agree and expectations have dropped dramatically this morning, with just a 30% probability of a raise in a few weeks. I suspect that will sink to about 10% within the next 10 days:
And remember that when it comes to rate hikes the Federal Reserve usually doesn;t surprise the market. From Goldman Sachs research in May, via CNBC.com:
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.
Of course, the message from the Sept FOMC meeting will be that the November 2nd meeting is ‘Live’, but there is no way in hell they will move 6 days prior to the most contentious presidential election in decades. It’s all about the December meeting now. Fed Funds is pricing a 60% chance of a hike. That’s fine and good. Most agree the Fed needs to take prudent steps to normalize rates to avoid one of two scenarios, keeping them too low for too long forging another risk asset bubble, or not having them high enough to lower to combat an impending recession.
Stocks are higher on the jobs number today. And that has everything to do with another Goldilocks situation where the economy is alright but not alright enough to raise rates. But remember, an important part of the story is that Goldilocks falls asleep and doesn’t notice when the bears come home.
While I would not expect a hike in Dec to cause the sort of financial market dislocations we got this past Jan/Feb after last Dec’s hike, the real risk is that the Fed does so into a weakening economy. While the August report was not a disaster by any means, average hourly earnings rose less than the prior month, and while the unemployment rate at 4.9% is below the Fed’s prior target of 5%, inflation is well below their 2% target. Couple that with yesterday’s news, weak August auto sales, August manufacturing data that was below forecasts and signaling contraction and Costco’s (COST) same store and quarterly sales miss, and all of the sudden, the data dependent Fed with a Hawkish bent may find themselves turned around and redefining what ‘Live’ meetings mean.
For now this likely keeps a lid of volatility until a shift in the Fed centric news cycle (assuming no external shock). Stocks likely trade in a range with an upward bias. The election polls obviously matter, but only if they show an uncertain race. So that’s something to keep an eye on. In October we get Q3 earnings and if those are good we could see a stock into a likely December hike. Q3 has been good for stocks so far, up 4% in the SPX, and we could see fund managers mark those higher into quarter end. Of course, after the holiday weekend the vacation vol crush ends, and we’ll get a better sense of how euphoric or pessimistic participants are now knowing the likely path of the FOMC into year end.