The latest jobs report came in weaker than expected, and the markets reacted positively to the news, reflecting investor beliefs that a September rate hike is now less likely. August non-farm payrolls increased 151,000, well short of the consensus estimate of 180,000, and the unemployment rate was worse than expected as well (4.9% versus the 4.8% consensus).
Nevertheless, Goldman Sachs thinks the jobs report was strong enough to warrant a rate hike next month, and believes the odds of a rate hike actually increased. Goldman estimates the probability of a rate hike at 50% (up from 40% before the announcement), and expects the Fed to raise rates at least once this year with 80% probability. The Fed funds rate now implies a 25% chance of a September rate hike, compared to 18% after the prior's month's jobs reading.
Investors should not take Goldman Sachs seriously. Most of the underlying economic data (for example declining industrial production, weaker ISM manufacturing, low core inflation) suggests we are on the brink of, if not in, a recession already. This means that the jobs and unemployment data (which is flawed and misleading in a number of ways) are the only figures the Fed can lean on to justify a rate hike. Therefore, when the jobs numbers comes in weaker than expected, the probability of a rate hike should not increase. Like the Fed, Goldman is all talk, and we believe the bank has a vested interest in substantiating the Fed's claims (that the economy is strong and that rate hikes are imminent), to help get Hillary elected. Given the uncertainty of what could happen under Trump, a Hillary presidency would better serve the interests of GS (and the political ties it holds with the white house).
This brings me to my next point. We believe the Fed never intended to raise rates in September, and that the jobs reports are basically meaningless to the Fed's decisions. The Fed's priority is to perpetuate the narrative that the economy is strong and that Obama's policies have worked, in order to get Hillary elected. The last thing they want to do is risk another huge stock market selloff (which happened in January after the Fed raised rates a mere 25 bps) on the eve of the election. A Trump presidency would likely spell the end for Yellen.
Figure 1: S&P 500 Price Graph
The Fed is putting political interests above its traditional mandate, and the implication is that the jobs reports won't have an impact on Fed policy. The idea that the chances of a rate hike increased after the latest jobs report doesn't make any sense when you dig into the underlying data and consider the Fed's motivations. Stocks (NYSEARCA:SPY) will continue to climb higher this year, but it won't be because of an improvement in underlying fundamentals.
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