LONDON, Oct. 19, 2015 /PRNewswire/ -- Ahead of this month's FOMC meeting, it's widely agreed that the US is still on track to be the first country out of the major currencies to increase interest rates - but not until early 2016.
With Core PCE at 1.3% and two months of jobs growth below 150,000 - plus flat wages, low inflation, a shrinking labour market, and global concerns stemming from China and emerging markets, it is becoming increasingly difficult for the Federal Reserve to begin normalisation this year.
"The Federal Reserve kept the Federal Funds Rate on hold at the September 17 meeting. This was a highly anticipated release given it was the first real possibility of a Fed rate hike since 2006. The market was pricing a 30% probability of liftoff," explains Jarratt Davis, Head of FX at Smile Global Management.
"With Core PCE sitting at 1.3%, the Federal Reserve will likely need to see a move higher in inflation before being confidence that it is moving back towards the 2% target, especially since recent labour market prints have disappointed.
"The press conference also mentioned the recent financial market volatility and the slowdown in China reasons against raising rates at that meeting. The economic projections showed expectations of a lower rates than previously expected for 2016. Yellen did not rule out a rate increase at this month's meeting. However, the market is pricing a December liftoff with higher probability."
CME Group Fed Fund futures see 11% chance of October liftoff versus 39% of December. The USD sold off across the board after the rate decision and during the ensuing press conference. However, USD losses were capped and the currency began to regain strength 24 hours post decision.
"Many Federal Reserve members stated that the decision to hold was a close call at the September meeting. However, the meeting minutes released on October 8 failed to paint that picture - feeding the sentiment that an interest rate hike will most likely come in 2016," adds Jarratt Davis.
"The employment situation in the US has recently come into question with back to back poor showings on the jobs creation front. After a stellar year of mostly 200,000 plus prints, August and September posted 136,000 and 142,000 respectively. While wages beat expectations in August at 0.4%, they remained unchanged for September - taking an October rate hike off the table, and potentially a December one as well. Labour force participation also declined to its lowest level in nearly 40 years, showing a shrinking labour market."
For further market commentary from Jarratt Davis, please email [email protected].
SOURCE Jarratt Davis