Weekly Fed Watch - Markets regained some confidence. Will it last?

The market regained some confidence in FED's interest rates hike this year. We saw some positive data coming out of US last week. It’s important to note that by “positive” I mean, better than expectations rather than an actual good number.

Looking at the major components of monetary policy, I see much less signs of recovery that the “hype” in the market would suggest.

GDP – higher than expected but lower overall

Prelim GDP q/q printed whooping 1% in the month of February 12016, this was much better then market’s expectations of 0.4%.

Looking at the longer time frame,this figure is lowest since May 2015, where US economy contracted at a negative 0.7%. It did recover from there onwards and printed:

3.7% in August 2015

2.1% in November 2015

Last week we saw another consecutive lower number (1%) in the first quarter of 2016.

The fact that US Economy is slowly shrinking is overshadowed by even lower market expectations. Ironically, this is great news for US Dollar and interest rates expectations.

CPI – 0.2% is hardly FED’s mandate goal

At the same time, Core CPI printed 0.2% vs 0.1% expected. “Higher “inflation number gave an additional confirmation that US economy is growing. Having said that, worth noticing that the inflation near 0% is barely any sign of recovery and surely way below the FED's mandate.

NFP – Still below 200K mark

Employment figures seem to be overshadowed again by other inflation related indicators. Market doesn’t pay as much attention toit at the moment. NFP printed 151K VS 189K expected. US economy added less than expected jobs in February. This is first number below 200K mark since October 2015 (6 months’ low). Lower print seem to be ignored.

Average Earnings – Up this market but will it follow through?

Most definitely this piece of data has much bigger impact on the prices than NFP.

As FED is looking desperately for any signs of inflation, they decided to look into wage inflation too.

AE report came out at 0.5% growth, this was up from expected 0.3%.

Great news for the market. Looking at the longer time frame, AE have been flat over the last few months. Let’s see if this continues into the 2016.

FED Watch show that short term bond traders are pricing in slightly more probability of FED increasing IR week over week, but again, there aren't any spectacular turnarounds.

Only December 2016 shows over 50% chance for the hike. This is long way away.

March is priced in @ 2%. This is down from 8% previously
April is priced @ 20%. This is up from 18% previously
June is priced @ 32%. This is up from 25% previously
July is priced @ 35%. This is up from 27% previously
September is priced @ 43%. This is up from 32% previously
November is priced @ 47%. This is up from 33% previously.
December is priced @ 59%. This is up from 42% previously.