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Handicapping the Fed: June, July or Not at All?

June 2, 2016

Enterprise Trust Company

While the next FOMC meeting is not scheduled until June 15th, this week’s economic data releases from several government and private sources may be critical. The Fed has signaled its intent to raise short-term interest rates. Whether or not they raise their Fed Funds target at the June or July meeting could depend on the strength of economic data released this week. Let’s look at the data we have so far and what’s to come tomorrow. Based on that, we can handicap the odds of a Fed move this month or next.

First of all, the data points mentioned in this commentary are all shown in the table below for your reference. Let’s start with Personal income and Spending released by the Commerce Department on Tuesday. Personal Income was in-line with economist expectations but Personal Spending far exceeded expectations and was the strongest reading of this economic gauge in seven years. Additionally, the report showed that the Fed’s preferred measure of inflation, the Personal Consumption Expenditure (PCE) index, ticked up in April to 1.1% year-over-year (YoY) from 0.8% YoY in March. Strong numbers and just what the Fed wants to see, score one for tightening.

On Wednesday, the private research firm Markit and the Institute of Supply Management (ISM) released their indices of manufacturing strength in the US economy. Both exceeded expectations, the ISM report by a wide margin. These are surprising numbers given the USD’s strength over the past 18 months. Another tally for tightening, making the current score: Tightening 2-No Change 0.

Today is a slower news day but still has some important releases. The ECB met this morning (US time) to determine if any change to European monetary policy was warranted. The central bank decided to maintain their current aggressive policy stance and to increase their bond buying program to include corporate bonds, in their effort to fight deflation. This indicates continued European weakness and is not what the Fed would like to see. Score one for no change. Also today, Initial Jobless Claims were released by the Labor Department. Claims ticked down slightly and were lower than economists expected, but not much. Call this a draw.

That takes us to the big money economic release tomorrow, the May jobs report. This actually trumps everything. There are three key data points to consider; the number of jobs added to non-farm payrolls, the unemployment rate and average hourly earnings month over month. If we see more than 200k jobs added, the unemployment rate fall below 4.9% and wages increase at a faster clip than 0.2 to 0.3%, it is all but certain the Fed will move in June. If these releases are all weaker than expected, the Fed will likely not move in June or July.

It’s clear there is strong sentiment at the Fed to tighten. It is less clear that they will. Chairwoman Yellen was quoted in a speech last week saying, “probably in the coming months” an increase would be appropriate, hardly clear cut. Keep in mind, based on our last commentary that the capital markets seem comfortable with the idea of a Fed tightening. Time will tell for sure but portfolio adjustments are probably not warranted.

Disclosures: This piece discusses general market activity, industry or sector trends, or other broad-based economic, market , or political conditions and should not be construed as research or investment advice. The opinions expressed are those of the author and do not necessarily represent the opinions of Enterprise Bank & Trust. Past performance is no guarantee of future performance. No diversification strategy can guarantee against loss.


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