“In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal-funds rate has strengthened in recent months.”
That’s all she had to say at Jackson Hole to turn sentiment in the forex market around 180 degrees.
The fact is no financial market in the world has been more skeptical of the Fed than the forex market. Even in the staid fixed income arena, yields have started to inch up as U.S. data and the Fed’s rhetoric started to turn hawkish this month.
But currencies refused to believe the message from the Fed until Ms. Yellen spoke on Friday. Her words were hardly definitive, but coming from such an unrepentant dove as Ms. Yellen — they carried weight — suggesting that the Fed is likely to move on rates sooner rather than later.
|The greenback is looking good.|
I was always under the impression that the Fed would never dare to hike rates in the middle of a Presidential election campaign, but history proves me wrong. The Fed has moved on monetary policy even during the final month of the election and may do so this year as well, despite the very partisan nature of this year’s battle. Ironically enough, Ms. Clinton’s commanding lead could provide the Fed with the cover to act in September since its policy move is unlikely to have much political impact this season.
For Ms. Yellen, the far greater concern may be the credibility of the Fed itself. With Fed officials delaying the normalization process by more than a year, they have lost a tremendous amount of market trust. That’s especially true in the currency market, which appears to have been operating on the Missouri motto – show me. With U.S. data demonstrating steady growth in both wages and jobs, the Fed is feeling the pressure to act. If they move in September, they could buy themselves another six months and observe the economy without being forced to act again.
|No financial market has been more skeptical of the Fed than the forex market.|
That’s why this week’s employment number looms so large. A good print of 200K new jobs would provide the Fed with the cover to act now and will relieve the pressure on the Fed for several months to come. Another disappointment, however, will deflate the dollar rally once again and will only fortify the skepticism of the dollar shorts. But for now, it’s all green lights for the greenback.
The latest on the job market continues to impress: According to ADP, private sector hiring stayed strong in August as employers added 177,000 jobs. That’s a bit better than the 175,000 jobs economists had expected. ADP also revised July’s gain UP to 194,000 from the original estimate of 179,000. Economists and investors use ADP’s data to get a feeling for the Labor Department’s job report, which will be released Friday. Estimates are calling for nonfarm payrolls to rise 185,000. If the number is decent enough, it may give the Fed more fodder to potentially raise rates. Keep your eyes peeled.
Looking for a luxury pad? Well, the latest data may give you a buying opportunity. In fact, according to the National Association of Realtors, sales of homes above $1 million fell 4% in July. The culprit: Aggressive pricing, oversupply, and jitters over where the financial markets are headed. “That market was the first to recover after the financial crisis, but it’s run its course,” said Jonathan Miller of Miller Samuel, a real estate appraisal and consulting firm. Prices have dropped in San Francisco and Bellevue, Washington — home to tech workers whose bank accounts are more closely tied to stocks — and the Hamptons, New York’s swankiest collection of neighborhoods.
Don’t look now, but the U.S. consumer may be getting a bump: The consumer confidence index rose to 101.1 in August from a revised 96.7 in July, the Conference Board reported. That’s the best number since September, 2015 AND it surpassed Wall Street expectations of 97. According to Lynn Franco of the board: “Short-term expectations regarding business and employment conditions, as well as personal income prospects, also improved, suggesting the possibility of a moderate pickup in growth in the coming months.” And she may not be too far off: GDP is expected to grow about 3.5% in the third quarter, a big improvement over the second quarter’s measly 1.1%.
The Money and Markets team