According to Nick Gartside, manager of the JP Morgan Global Bond Opportunities Fund, while the Fed is likely to keep the possibility of a December hike alive by citing their continued data dependency, it is looking increasingly unlikely.
“If we think of the scorecard since the September Fed meeting, the international factors to which the Fed has alluded are arguably now a little better: US dollar strength has abated and emerging markets volatility has subsided. However, domestic US labour market data is somewhat weaker and Q3 GDP is tracking in the region of 1%. Coupled with inflation which remains at low levels, this suggests 2016 is a more probable timeframe for rate hikes,” Gartside sai.d
TwentyFour Asset Management’s Mark Holman, agrees that a move today is unlikely.
“If you take what the various committee members have been saying at face value, there was a chance they would do something at this meeting, but the data has definitely been softer.
Indeed, as he pointed out in a recent blog, Holman said that while the Fed clearly got some of the job creation it was looking for, “the market has taken a contrarian view because the 143,000 gain for September was much lower than the 200,000 forecast. The market is saying that this is symptomatic of a slowdown, essentially second guessing that the Fed will change its mind.”
The second reason why it is likely not to move is that there remain very few signs of inflation in the developed world.
“It does seem odd to be raising rates when inflation is so well anchored and by the time these transitory factors have passed through, we may well have other transitory factors or new data,” Holman said.
The final point worth bearing in mind according to Holman is the external factors now being considered by the Fed.
“The Fed will want to see relatively stable (i.e. not falling sharply) markets when they make the decision to lift off. Interestingly we have seen more stability in October, despite softer data on the growth front around the world,” he said.
According to Gartside, however, the current situation has left fixed income markets in a sweet spot.
“There is economic growth; not enough to cause any inflation, but enough to keep the economy well out of recession. This keeps monetary policy easy and underpins bond markets. Other central banks including the ECB and the Bank of Japan are likely to ease more over coming months. This likely pushes Eurozone and Japanese government bond yields lower and makes US Treasuries more attractive on a relative basis. In fact, one could argue that US Treasuries look like high yielding assets in comparison.”
