Anticipation of Fed Policy is Shaping the Investment Climate - BBH
Research Team at BBH, suggests that through the first part of the year, the swinging pendulum of expectations for the trajectory of Fed policy has been a major driver in the foreign exchange market.
“This is true even though the ECB and BOJ continue to ease monetary policy aggressively. The Australian and New Zealand dollars appear to be influenced more by the shifting view of Fed policy than the expectations in some quarter that the RBA and RBNZ could cut interest rates as early as this week.
Indeed, anticipation of Fed policy is shaping the investment climate more broadly than simply the dollar's exchange rate. The dollar's setback will likely support a broad array of commodity prices, including oil and gold. It may also support so-called risk assets, emerging market stocks.
The market responded dramatically to the shockingly poor jobs growth. At its recent peak in late May, the June Fed funds contract discounted about a 50% chance of a hike this month. Now the pricing is consistent with no chance of a hike.
To be clear, employment growth and economic growth have different cycles. Knowing the former does not help forecast GDP. Consider our recent experience. The US posted an average monthly gain in nonfarm payrolls of 192k in Q3 15, 282k in Q4 15, and 196k in Q 116. The economy expanded at annualized rates of 2.0%, 1.4%, and 0.8%, respectively.
Job growth is averaging 80k here in Q2 16. At the end of last week, both the Atlanta and NY Federal Reserves updated their GDP tracker. They are nearly identical. The Atlanta Fed tracker is at 2.5%, and the NY Fed's is at 2.4%. The point to be appreciated, and not to diminish the disappointment with the jobs data, is that the economy appears to be rebounding smartly, even if May is a bit off April's heady pace. The NY Fed is also "tracking" Q3 GDP. It is also above 2%, which is regarded as trend growth for the US.
One of the implications of slower jobs growth is better productivity figures and lower unit labor costs. This will likely be evident in the revisions to Q1 figures due out in the coming days, and especially in Q2.
We had argued that a June hike was not particularly likely given risk-rewards considering the UK referendum, and the Fed's cautious DNA. However, we are reluctant, with the current information set, to rule out a July hike. While weekly jobless claims have stopped falling, there is no compelling reason not to expect the May weakness to be a statistical fluke, the kind of which is not so uncommon. In March last, year, the US economy grew only 84k jobs; in December 2013, there were 45k jobs created; in April 2012, job growth fell to 75k; and in May 2011, a net 73k jobs were created.
In no case was the disappointment a signal of the end of the economic or labor cycle. In two of the four examples, the following month jobs growth was over 200k. One time it reached only 187k the next month. Only in 2012 did it take several months.”