Fed: The Signal and the Noise

Published on June 3, 2016

Wow. We know the drill about how one number does not a trend make, but surely this morning’s Non-Farm Payrolls print is one of those rare big miss moments that has not only painfully whipsawed the market, but is going to generate no small dose of uncertainty on the policy front. And that is probably the key takeaway from this morning.

Our initial thoughts:

** The odds on a rate hike at the Federal Open Market Committee’s June meeting is somewhere between nil to none and indeed, the market is right back to the 4% probability on the eve of the more hawkish Fed messaging. In that sense, Chair Janet Yellen’s speech on Monday just got a little easier, in that she at least won’t have to worry about preparing the markets for a possible move this month.

** The NFP was all bad, no way around it, but there was at the same time an awful lot of noise in the numbers that will make it hard to sift through them for the signal on the near term trends in the labor market and the economy. In policy terms, that will further add to the sense of caution that, as we have been noting, was already tipping  the Federal Open Market Committee to July as the more likely and earliest meeting for a rate move, due to the Brexit factor (SGH 5/25/16, “Fed: The Brexit Factor”).

** So despite today’s number we would not rule out a July meeting rate move, as we suspect the FOMC will not be taking it off the table — if the Brexit vote goes against leaving the European Union, if financial conditions are supportive, and if the next NFP print resolves some of the confusing takeaways from this morning’s print; a lot of “ifs” to be sure, but that is what a data dependent path means we assume.

** But again, the reason for pushing back to at least July is the risk management caution; it is not – yet – that the data is distinctly turning south and undercutting the entire rational for policy normalization. The Fed is nevertheless likely to be a tad more unsure of how to interpret the data, and uncertainty in how to sift the signal from the noise always makes them cautious, and especially at potentially pivotal turning points.

** Fed Governor Lael Brainard is due to speak around lunch time today, and she is fairly certain to note the risk of just such a turn, which would add to the sense of dovishness in the wake of the shock jobs numbers. Indeed, in a mirror to last October, she will be following her fellow Governor, Dan Tarullo, who offered a distinctly dovish message yesterday. Together, the two are a counterweight to the consensus across the rest of the FOMC, which to be fair, is probably now a tad less hawkish on the near timing to the next rate move.

** All eyes will otherwise turn to Chair Yellen’s Monday speech in Philadelphia. We suspect she will acknowledge the crossed signals of the May NFP, but otherwise note the longer running accumulative gains in the labor market, and that job growth was supposed to slow, (ok, albeit not by this much and all in one month). And if anything else, the cross signals of data like this morning’s NFP will lend to the case she is likely to make about the merits of a gradual pace to policy normalization.

** Last Friday at Harvard, Chair Yellen said it may be appropriate to raise rates “in the coming months,” a loosely defined time frame that she will cling dearly to now as offering the maximum flexbility to calibrate the policy messaging to July and beyond through a scheduled speech in Jackson Hole in late August if clarity is still in short supply by mid-summer.

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