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11 Dec 2015
US: Dovish hike attempt coming soon - ING
FXStreet (Delhi) – Rob Carnell Chief International Economist at ING, suggests that implied probabilities for a 25bp rate hike at the 16 December Federal Open Market Committee (FOMC) meeting have been creeping steadily higher and price in close to an 80% probability of a hike.
Key Quotes
“The details of that labour market survey are not important. All that was needed was for disaster to be avoided. And a reasonable payrolls figure, no uptick in the unemployment rate and no significant downtick in the wages figures delivered exactly that.”
“It now seems that short of a catastrophe of some sort, the Fed will finally deliver the first rate hike in more than nine years in December. Perhaps the main surprise is that the rate hike is not more fully priced in given the fairly clear messages sent by FOMC members in recent weeks.
“The Fed will want to start the ‘normalisation’ process without invoking a strong reaction in currency markets, which would likely see the manufacturing sector suffer disproportionately. But at the same time, there is a case to be made for suggesting that the Fed has already waited too long before starting this process.”
“While we agree that this is a prudent way to behave, and one that is likely to be sensitive to any negative reaction in the US equity markets, it is entirely possible that against such a backdrop markets will sense that the Fed is falling behind the curve. We have not significantly adjusted upward our Treasury yield forecast for the middle of 2016. But it seems
to us that there is a strong possibility of at least a temporary spike in bond yields at the longer
parts of the curve that are not fully picked up by our quarterly forecast profile.”
Key Quotes
“The details of that labour market survey are not important. All that was needed was for disaster to be avoided. And a reasonable payrolls figure, no uptick in the unemployment rate and no significant downtick in the wages figures delivered exactly that.”
“It now seems that short of a catastrophe of some sort, the Fed will finally deliver the first rate hike in more than nine years in December. Perhaps the main surprise is that the rate hike is not more fully priced in given the fairly clear messages sent by FOMC members in recent weeks.
“The Fed will want to start the ‘normalisation’ process without invoking a strong reaction in currency markets, which would likely see the manufacturing sector suffer disproportionately. But at the same time, there is a case to be made for suggesting that the Fed has already waited too long before starting this process.”
“While we agree that this is a prudent way to behave, and one that is likely to be sensitive to any negative reaction in the US equity markets, it is entirely possible that against such a backdrop markets will sense that the Fed is falling behind the curve. We have not significantly adjusted upward our Treasury yield forecast for the middle of 2016. But it seems
to us that there is a strong possibility of at least a temporary spike in bond yields at the longer
parts of the curve that are not fully picked up by our quarterly forecast profile.”