Federal Reserve: September hike odds reassessed – Rabobank

Rabobank’s Bas van Geffen comments that weaker United States (US) Nonfarm Payrolls (NFP) and a drop in labour supply have reduced urgency for another Federal Reserve (Fed) rate hike, though policy remains data‑dependent. The report stresses that both dovish and hawkish factions at the Fed can find support in the latest employment figures, with upcoming US Consumer Price Index (CPI) and inflation expectations still crucial for rate expectations.

Labour data temper Fed hike urgency

"Following Friday’s employment report, the case for a Fed hike is weakening, but it is certainly not yet done for. The headline payrolls number disappointed, with a -23,000 jobs print and a 37,000 downward revision to the June estimate."

"Our US strategist noted earlier that employment growth has been slowing for several months, and Friday’s report confirmed that downside risks to the labour market have not disappeared entirely since the three insurance cuts last year. This could strengthen the argument of the Fed’s doves."

"Yet, the employment report also allows the hawks to argue that the labour market is mostly suffering from supply constraints, even if they are a little less confident in their case than before."

"In short, the labour market data may have removed some urgency, reducing the odds of a September hike. However, incoming inflation data remain key."

"Fixed income markets will particularly be interested in consumer’s longer-term inflation expectations, considering the recent sensitivity of US Treasury yields for upside inflation risks."