What does it take to keep the Fed rate hike on the table in December?

Outlook:

Trading is stifled by uncertainty over the upcoming data, especially payrolls on Friday. Yesterday’s trading ranges were abnormally narrow in bonds and FX. Traders hate nar-row ranges for the very good reason that any little thing can set off prices in a different direc-tion, raising the likelihood of false breakouts.

Traders might deny it, but in practice they prefer noisy markets with lots of news-driven price changes. These days the big news stories are non-stories—China is not falling into the slough of despond, just slower growth--as is perfectly normal given the extent of the earlier surge. The need for anxiety is much lessened. To be fair, Bloomberg has a story on various analytical groups’ proxy measures for activity and GDP, which is no doubt much lower than the official reports. But the Chinese can be counted on to incorporate these alternative measures into their official numbers to avoid looking silly or overly dishon-est. A sense of possible impending doom is vaporizing.

Commodities may be stabilizing in the wake of that acknowledgement. The FT notes that even oil is ac-tually pretty calm in the grand scheme of things. “Since the start of September the price of Brent crude has been stuck between $46 and $54 a barrel. Indeed, remove a couple of spikes and the range is just $4 for much of that period. Those are quite wide channels by historic norms but for recent times they are pretty tight. It rather suggests that the oil market may be, for now, finding equilibrium, and this is re-flected in the reduced cost of hedging via energy-related options.”

We are already so tired of the divergent policy theme that analysts have turned to talking about cross-rates. One of them is “sell the euro against the yen.” We have long noticed that when traders are befud-dled about the majors, they turn to the crosses. The euro/yen chart looks tidier, to be sure. The euro has also reached the 62% retracement level and if it keeps going, traders expect it to test the starting point at the previous low. This is an unwarranted assumption but when enough people believe it, they make it a self-fulfilling prophecy, and never mind what the ECB or BoJ are actually doing. See the chart on the next page. Tidy.

Unfortunately for news junkies, we are stuck with the same question as before: what does it take to keep the Fed rate hike on the table in December? Or, put another way, what does it take to remove the hike from the Fed’s table? We will be getting more data this week but the Big Kahuna is payrolls. Market News reports expectations are 175,000-200,000 (after 142,000 in September and 136,000 in August).

But the Fed has acknowledged that a slowdown in jobs growth is only to be expected at this stage of the recovery cycle, so a lower number might not be a screaming signal the hike is off the table. A really high number (like 200,000) would cement the hike deduction, while a really low number doesn’t necessarily take it off the table. Some commentators are already going overboard and talking about 4 hikes next year, which is probably silly—one promise we do have is “lower for longer.”

Bloomberg tries to make gold out of straw, saying we could get clues from the three Feds speaking to-morrow—Yellen, Dudley and Fischer. But they each have topics far off the policy divergence thesis. To say they have a unique opportunity to reinforce the message (yes, December!) is wishful thinking. Bloomberg writes “By hitting the same note on Wednesday, Yellen, Fischer and Dudley could help squelch an unusual period of public disharmony at the Fed that has confused investors and led to criticism of its communications.”

But the goal of these scheduled talks is not about Fed policy or communications. In fact, it would be weird and look desperate for “communications” to be mentioned.

We shall just have to wait. For today and probably tomorrow, whether the euro recovers or keeps going south can’t be answered. On the whole, the giant downside breakout bar sets the overall direction and we should expect the upside move to fizzle back past the recent lowest low. But the Draghi comments give pause. So does the observation that with Fed funds at a 50% probability of the Dec hike in the US, the policy divergence thesis is not fully priced in. Now is a good time to avoid active trading.