…with apologies to Prince.
The last 10 days brought a flurry of Hawkish dialogue from a number of key Fed personalities; specifically, Dennis Lockhart, Dennis Williams, and Eric Rosengren. For those who are confused over the Dove and Hawk designations, the easiest way to summarize the two camps is to put the Doves in the group that doesn’t want to raise interest rates and the Hawks into the group that wants to raise interest rates. While there are more academic and esoteric differences between the two ideologies, that simplification will suffice for this week’s Briefing Room report.
The reasoning behind the Hawkish remarks is that the Fed’s dual mandate of price stability (inflation at 2%) and employment is being judged as accomplished (or near to being met depending on the measure of inflation you’re using), and so the time has come for the data-dependent Fed to act. However, as we covered in a March briefing, the Fed has voiced concerns over soft macroeconomic data here in the U.S. and sluggish global growth. While the aforementioned Fed voices have indicated that June is a “live” meeting, and the market has drastically increased its assessment of the probability of a rate hike, we believe that any tightening in June would be too soon based on fragile economic indicators across the globe. As of May 19th, the markets were pricing in a 33.8% chance of a rate hike in June.
By Friday close, however, that probability had decreased to 26.3%. This came on the heels of a disappointing Philly Fed Index that showed the manufacturing sector in that region to be back in contraction. The Empire State survey reported the same disappointing results earlier in the week, and this chart shows the combination of the Philly and Empire State information as it pertains to expected ISM readings later this month:
This week’s job numbers showed a smaller decrease in jobless claims than expected, and the 4-week moving average of claims edged up after last week’s disappointing data and this week’s underwhelming decline:
While these numbers don’t give us immediate concern for an employment crisis, we’ll be eagerly watching the employment data between now and the “live” June meeting. Speaking of data that the Fed will analyze behind closed doors in June, the latest Brexit polls continue to indicate the decision is “too close to call,” despite the clever likelihood graphic from Bloomberg (as of May 20th):
As we turn to oil’s climb from $26 in February to recent levels above $47, there was little surprise that the rig count hadn’t changed week-over-week. A quick look at the amount of cash on the sidelines at energy firms leaves us wondering when producers are going to put money back to work in production, thereby capping oil’s recent gains as more supply comes back online:
As we’ve mentioned before, the knock-on effects of low energy prices were expected to show up sooner or later — and not just to the benefit of the American consumer’s wallet. While gas prices have declined since mid-2014, their fall hasn’t been nearly as drastic as the price of the input (oil).
(Sources: Bloomberg, Zerohedge)
Furthermore, the negative knock-on effects are beginning to show as energy firms tighten their belts, file for bankruptcy protection, or simply shutter their operations. North Dakota’s Williams and McKenzie counties (home to a portion of the Bakken formation) have seen a surge in unemployment as the price of oil has fallen since mid-2014. Granted, a small pause after years of white-hot growth is warranted, but the point of the double-edged oil price sword remains:
In Asia, Japan’s manufacturing contraction has continued to worsen. Production, new business, exports, and orders continue to weaken, while employment remains stable:
(Source: Markit, The Daily Shot)
And across the Atlantic, the IMF has called for debt relief efforts for Greece, as debt servicing costs are expected to consume an ever-increasing proportion of Greek GDP:
(Source: @fastFT)
Given the uncertain political landscape across Europe, the specter of an unchecked terror threat, deflationary pressures, a Brexit referendum, and Greek debt concerns, we’re not surprised that investors are fleeing Europe:
(Source: WSJ)
Despite the recent Hawkish commentary from various Fed personalities, the data — when taken in a global context — seems to favor the Doves in June. However, we do feel that the tightening rhetoric has jolted an otherwise complacent market into the potential for a rate hike in June. Even if some Fed officials are posturing for the sake of managing market expectations, one can only hope that transparency from the Fed (assuming the information is credible) will offer some stability as rate hike discussions “go live” in June. It would be far better for the Doves to shed tears instead of investors.
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