Today’s jobs report was supposed to be a tiebreaker for the Fed’s September rate decision, giving fed funds and eurodollar traders some respite after a summer that has been a gut-wrenching, dramamine-chewing rollercoster. It did not, in fact it boosted uncertainty, with the probability of a September rate hike rising from 26% to 30%.
In other words, any hope for clarity was promptly dashed with a job report that once again was both bad and good, depending on one’s bias.
Which means that the September 17th decision will come to the absolute wire, with little if any guidance available in the 13 days left until what may be the Fed’s first rate hike in 9 years… or not.
Here is an oddly accurate explanation of what it means if the Fed does hike rates on September, and alternatively, what it means if Yellen punts once again, and leaves the decision to the October or December meeting, or just punts to 2016 and onward altogether. As a reminder, Goldman does not expect the Fed to hike on September 17.
On Wall Street only 2 things matter: interest rates and earnings. Everything else is noise unless it impacts rates and earnings. No-one impacts interest rates more than the Fed. So the Fed’s September 17th rate hike decision is a big deal.
Should the Fed decide to raise interest rates, it will be the first Fed hike since June 29th 2006. In the 110 months that have since past, global central banks have cut interest rates 697 times, central banks have bought $15 trillion of financial assets, zero [or negative] interest rates policies have been adopted in the US, Europe & Japan. And, following the Great Financial Crisis of 2008, both stocks and corporate bonds have soared to all-time highs thanks in great part to this extraordinary monetary regime.
As noted above, a rate hike with a stroke ends this era. So:
If they don’t hike…
- It’s an admission that Wall Street threatens to reverse the recovery on Main Street
- It will lead to a short-term relief rally on Wall Street
- It will be relatively positive for EM/commodities/resources, as it unwinds the higher US growth/rates/dollar narrative
- It will be positive for higher-yielding assets
- It will be positive for growth > value, as the Fed is confirming the deflationary recovery
- In short, if the Fed’s failure to hike does not lead investors to completely abandon hope on growth and scurry into gold, cash & volatility, then look for the “barbell of 1999” to reemerge: Über-growth & Über-value were massive outperformers after the Asia crisis (Chart 9).
If they do hike…
- Watch the long-end
- If the long-end concurs with the Fed’s view of economic recovery, then banks, cyclicals and value stocks will receive a bid. Asset allocation toward “strong dollar” & “Fed tightening plays” will harden, with the exception that value will likely outperform growth
- If the long-end rallies, signaling a policy mistake, then cash, volatility, gold & defensive growth will be the way to go.
Most importantly, if the long-end rallies, it’s almost over and get ready to bail on any outperforming long-end position, as the reaction itself will signal the beginning of the end of the fiat regime.