A Potential Turn in the Market's Reaction

Potential, Turn, Market, Reaction, Macroeconomics, fx trader, forex

19 Sep 2016

Yellow lights are flashing.  Bonds remain heavy despite a weak spate of data that would seem to remove nearly any chance that Fed will hike rates this week. The implications of the disappointing retail sales data indicates that estimates for Q3 GDP will be revised lower. 

This quarter does not seem to be the breakout that had appeared to be the case previously. The output from industrial sector, which accounts for a little less than a fifth of GDP fell in August, and the July gains were shaved in revision.  

There were reports that might have blunted the negativity, but they seem overshadowed by the other reports. Both the September Philadelphia and Empire State Fed surveys, which are part of the first readings the market receives for a new month, showed serially gains that exceeded expectations. The US economy is still snapping the nine-month below trend growth period, but it is not doing it with a punctuation point. 

My calculations suggest that at an implied yield of three-quarters of a basis point, the September Fed funds futures has about an 11% chance of a hike discount. The CME, where the contract is traded, estimates it at 12%. Bloomberg's WIRP has it 18% and has been consistently running higher than the CME and my calculations over the past few weeks. 

There is a greater chance that Trump is elected than the Fed hikes rates next week. Nate Silver's fivethirtyeight.com blog puts the odds at 37.4% currently based solely on the polls.  If one adds to its economic and historical data, the odds edge up to 38.5%. Trump has narrowed the gap, which now stands at the smallest since late-July.