US: Odds of Fed hike fade to black - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that the chances of a Fed hike this year have faded further after a second weak US retail sales report in a row in August, weighing on the USD.

Key Quotes

“Retail sales grew modestly from around July last year until March this year, surged in Q2, but stalled again in July and August. From a year earlier, growth rates are modest at +1.9%y/y for total sales, +3.4%y/y ex-autos and gas, +2.8% ex-food, autos, gas & building materials (the control group)

Following the retail sales report, the Atlanta Fed GDP forecast for Q3 was revised down from 3.3% on 9-Sep to 3.0% q/q saar.  While this would represent an above trend quarter, coming after three soft quarters averaging around 1% saar, it would leave annual growth below trend at around 1.5%y/y.

In other data, the first two regional manufacturing surveys for September in New York and Philadelphia improved a little but remained relatively low.  Philadelphia recovered more than New York.  Manufacturing production was weaker than expected in August, and capacity utilization lower than expected, in general confirming the weak ISM report in August.

Capacity utilisation has been dragged down by the energy sector and a stronger USD from a recent peak of 78.9 in Nov-2014 to 75.5 in August this year (up from a recent low of 74.9 in March).  In a long-term view, this is relatively low.  It is below its average for the current decade, and much further below the averages in the 1980s and 1990s near 80 and 85%.  Perhaps this is a structural decline, but it does suggest headwinds to a strong recovery in capital expenditure.

On Friday, in the USA we see the August CPI inflation data and first reading of the University of Michigan consumer sentiment survey for September.  On Monday and Tuesday, we see some housing data ahead of the FOMC policy meeting on 21 September.

The data over the last month suggests that the Fed will err on the side of caution and decide to not raise rates.  This would support the argument that Presidential candidate Trump has been making lately that the Fed and Chair Yellen have been holding rates low to support the economy and boost the chances of his opponent Clinton.

The market has essentially given up on a Fed rate hike next week and is pricing in only around 15bp of a possible 25bp hike in December (assuming no move before then, this represents around a 60% chance).  Bloomberg’s WIRP page says there is an 18% chance of a hike next week, but this appears to flatter the odds and doesn’t seem to account for the lift in the effective funds rate from around 37 to 40bp since mid-year, the implied probability is more like less than 5%.”