KEY TAKEAWAYS
• We continue to expect that the Fed won’t raise rates until the December 2016 meeting, but a potential path to a September hike also exists.
• Key items to watch for a possible September hike include U.S. manufacturing, financial conditions, the labor market, wage inflation, foreign central banks, and comments from key Fed officials.
As of Monday, August 1, 2016, the fed funds futures market is pricing in less than a 20% chance that the Federal Reserve (Fed) raises rates by 25 basis points at the conclusion of its next policy meeting on September 21, 2016. This assessment is the result of the Federal Open Market Committee (FOMC) statement released on July 27, 2016, which provided no hint of a hike as soon as September, and a weaker than expected report on gross domestic product (GDP) in the first half of 2016, released on Friday, July 29, 2016. We continue to expect that the Fed will raise rates once this year, likely at the December 2016 meeting. However, there is likely a narrow path to a September hike, which includes U.S. manufacturing, financial conditions, the labor market, wage inflation, actions of foreign central banks, and of course comments from key Fed officials. We’ll take a look at that potential path in this week’s report.
U.S. MANUFACTURING
As this commentary was being prepared for publication, the Institute for Supply Management (ISM) released its manufacturing index for July. The index was at 52.6 in July 2016 versus 53.2 in June 2016. The 52.6 reading in July 2016 was the fifth consecutive reading over 50, indicating an expanding manufacturing sector in the United States. The ISM had been below 50 for six months, ending in February 2016, held down by a soaring U.S. dollar and plunging oil prices. Another ISM report is due out on September 1, 2016, and in order for the Fed to consider raising rates on September 21, 2016, the September ISM report — along with the other key reports on the health of the manufacturing economy due out over the next seven weeks — would have to continue to show solid improvement despite another leg down in oil prices in recent weeks and a modest move higher in the value of the U.S. dollar after the Brexit. In short, the timing of the next Fed rate hike remains “data dependent.”
These reports include:
• Industrial production for July (released August 16, 2016) and August (September 15, 2016)
• Markit PMI for manufacturing for August (August 24, 2016)
• Orders and shipments of durable goods for July (August 25, 2016)