Shortly after the latest deteriorating ISM data was released yesterday, which showed that the US services sector was rapidly following US manufacturing into contraction, we had one question: how long until Goldman flip-flops again, and changes its surprising call from last Friday which bucked the Wall Street trend and boosted September rate hike odds from 40% to 55%, which in turn almost singlehandedly catalyzed a kneejerk reaction in Fed Fund futures on Friday, sending them virtually unchanged on the day of Friday’s disappointing jobs report.
All eyes on emails from Jan Hatzius backing off from his 55% September rate hike odds
— zerohedge (@zerohedge) September 6, 2016
We didn’t have long to wait: overnight Hatzius did just that, when he said that “we are lowering our subjective odds of a rate increase at the September FOMC meeting from 55% to 40%.” At the same time, Goldman is “nudging up the odds of a rate increase at the December meeting to 30% from 25%, but taking the cumulative odds for at least one hike this year down to 70% from 80%. With slightly softer data and less “time on the clock”, a rate increase this year now looks a bit less certain, in our view.“
Which also means Gartman 1 – Goldman 0, as Goldman – at least as of this moment – is the undisputed “fade” champion.
From Goldman’s Jan Hatzius:
BOTTOM LINE: San Francisco Fed President John Williams advocated for raising rates “sooner rather than later”, but offered no new clues on whether the committee will be ready to act on this month. His speech followed today’s non-manufacturing ISM index, which dropped sharply to 51.4 from 55.5 previously. As a result of the ISM miss and lack of clear signal from Fed officials, we are taking down our odds of a hike at the September 20-21 FOMC meeting to 40% (from 55%).
MAIN POINTS:
- In remarks this evening, San Francisco Fed President Williams advocated for raising rates “sooner rather than later”, but did not stress the need to hike at the September FOMC meeting specifically. The lack of explicit guidance from President Williams tonight—or from other Fed officials in recent days—suggests FOMC participants are not especially concerned about the low odds of a hike discounted by markets (about 20% by our estimates). Before past rate increases, the minimum amount discounted by markets 15 days prior to the decision was about 70% (excepting February 1994), and we had expected communication from key officials after the August employment report if indeed they planned to raise rates this month.
- In addition, earlier today the ISM reported that its non-manufacturing index declined sharply to 51.4 from 55.5 previously. While this is just one indicator, the surprise was meaningful, and there may have been some Fed officials feeling lukewarm on a September hike to begin with. In these circumstances, one large surprise could carry a lot of weight.
- As a result, we are lowering our subjective odds of a rate increase at the September FOMC meeting from 55% to 40%. We are nudging up the odds of a rate increase at the December meeting to 30% from 25%, but taking the cumulative odds for at least one hike this year down to 70% from 80%. With slightly softer data and less “time on the clock”, a rate increase this year now looks a bit less certain, in our view.
And with Goldman’s capitulation, it means that the hawkish exuberance of the Jackson Hole meeting is now completely gone.
Perhaps less surprising, is that the dollar is up on the news.
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