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    Equities, Bonds, Currencies, Futures Agree on Rate Hikes, Not Now

    Federal Reserve Chair Janet Yellen's speech on Monday in Philadelphia answered few questions about whether the dismal payrolls report had changed the banks prognosis for the U.S. economy.

    Perhaps because the central bankers were as surprised as everyone else by the May employment data. 

    Ms Yellen said 'I expect that further gradual increases in the federal funds rate will probably be appropriate...".  She was unsually straightforward about what the central bank does not know.  "Unfortunately, as I noted earlier, new questions about the economic outlook have been raised by the recent labor market data. Is the markedly reduced pace of hiring in April and May a harbringer of a persistent slowdown in the broader economy?" 

    Whatever the final denoument on Chair Yellen's economic questions, the policy implications were clear.  A rate increase is not in the cards until the governors have more information. Cue another few months of 'data dependency'.  

    Markets agreed. The already minimal chance of a hike in June, 7.2 percent before her speech in the fed funds futures on Bloomberg, slipped to 4.2 percent after.  July's probability dropped to  24.3 percent from 31.2 percent and September fell to 38.6 percent from 43.1 percent. November and December were relatively unchaged at 49.0 percent and 58.1 percent from 49.6 percent and 59.4 percent earlier today. 

    The market response was uniform, U.S interest rate are likely to remain as they are for the next six months. Equiites rose, Treasury yields and the dollar fell.  

    Will the next few months permit the Fed to restart the rate normalization it desperately wants? Apparently the Fed has no better idea than anyone else.

    Joseph Trevisani

    Chief Market Strategist


    Charts: Bloomberg





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