Friday September 4

Stocks price in as investors price in possible Fed tightening. The S&P500 fell 1.5% to 1,921 while the Dow Jones 1.7% 16,102. The jobs report was mixed, with the unemployment rate falling to 5.1% however payrolls increased significantly less than expected. Payrolls increased 173,000 whereas economists were expecting around 220,000. In spite of the disappointing payrolls, markets still believe the data left open the possibility for a rate increase later this month. To reflect these expectations, short term Treasury yields increase as the yield curve flattened. The two year yield rose one basis point to 0.70% and the ten year yield fell 4 basis points to 2.13%. Both the two year and the ten year were lower over the course of the week. The dollar was firm on the day after an initial advance to 95.97. The euro rose marginally against the dollar to $1.1134 in the wake of yesterday’s drop following Draghi’s dovish comments. The German bund yield continued to fall with a 6 basis point decrease to 0.67%.

Today’s data maintains anxiety in the market as investors prepare for initial rate hikes. When the Fed meets on September 17 the FOMC will discuss whether or not the economy is in a healthy enough state to warrant higher interest rates, and todays data will be a large piece of the equation. Many analysts agree that while the economy still may be in a somewhat fragile state, US corporations and households can absorb somewhat higher rates. The US has added 8 million jobs over the last three years (which is considered a fast pace) and unemployment is at a pre-crisis level. According to Fed funds futures the odds of a rate hike this month are around 33%. While the US economy appears relatively healthy as of now, uncertainty remains regarding the effect of a stronger dollar on US corporations.
Jeffrey Lacker, president of the Virginia Fed, seems to be in support of tightening on the short end of expectations. “I’m not arguing that this economy is perfect by any means, but nor is it on the ropes, requiring the stimulus of low monetary policy interest rates to get it back into the ring… It’s time to align our monetary policy with the significant economic progress that we have made.” Lacker is a voting member of the FOMC this year and he is typically on the hawkish end of the spectrum. Hawks and doves remain divided on whether or not the FOMC should let market volatility and international turmoil affect the decision. Wlliam Dudley expressed dovish sentiment following Cina’s slowdown, while various hawkish members have said they will not let volatility affect the decision. Lacker said today’s report was “strong,” and many analysts had expected that a report that was generally accepted to be strong would likely lead to higher rates by the end of the month.
Friday September 4

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