Market participants had high hopes that last Friday’s jobs report would help answer the question of whether or not the Federal Reserve will hike rates when the committee meets on September 20-21. Unfortunately, the reported gain of 151k jobs (which we’d characterize as “good, not great”), coupled with the tick down in average hourly earnings and average hours worked (by 2/10 of a point to 2.4% and 34.3 hours respectively), leave the market in the same condition it was coming into Friday: uncertain. The non-farm payroll report is arguably the most important economic data print each month as it relates to Fed action. However, we are watching two other metrics closely to glean insight into what the Fed may be thinking: financial conditions and the strength of the U.S. Dollar.
The financial conditions index is important because it gives an indication of the amount of stress in the financial system, and it can be an important barometer of financial activity by businesses and households. The measure has been steady in recent months and is currently at a level just below where it was when the Fed last raised rates in December, 2015.
The U.S. Dollar has implications for economic growth, inflation and global market volatility, particularly with regards to emerging markets. A stronger dollar has at times caused market dislocations over the last 18 months. Although the dollar (as measured by the DXY Index) has ticked up in recent months, it is still at a lower level than when the Fed hiked last December.
So what is the Fed going to do? The answer is, who knows? The Fed doesn’t even know at this point. But we think it will be watching to see how these metrics evolve along with other incoming economic data to help arrive at a decision. What’s important for our clients to remember is that regardless of whether the Fed does or doesn’t raise the Fed Funds rate in a few weeks, the impact on longer-term bonds will likely be muted as longer-term rates remain in the range-bound state they’ve been in.
Source: BLS, Bloomberg