Sunday, September 11, 2016

Consensus Says No Rate Hike, But Beige Book Says Maybe

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*The Beige Book looked more hawkish month to month.
*The Fed has many other reasons to hike.
*A hike would surprise markets and likely be a stock market risk.

Consensus on the street appears to expect no rate hike after the non-farm payrolls report ("NFP"). The more silence from the Fed after NFP may also mean they are divided. Beige book actually showed tighter labor markets month-to-month. We review multiple real reasons the Fed may want to tighten. If we do in fact get a hike, markets have more risk given that nobody expects it.
Beige Book
Let's look at the recent Beige Book representing August versus the previous release that represented July. Remember the members responsible for this report will be meeting and giving their take at the next rate decision due out Sept. 21st.
While many reports came out on what the Beige Book said, it's more important to see what it said versus the previous Beige Book. The change of trend is what will be top of minds when the Fed decides their next hike. The change in language in the Beige Book can give us a preview to their upcoming meeting.
For example, most people looked at the NFP report and said it slowed in August from July. That's not what Beige Book said. The Beige Book just released that represents most of August said, "Labor market conditions remained tight in most Districts."
Now, looking at it in isolation will not give you the full picture. Let's look at it compared to what the same Fed officials reported the previous month. The Beige Book that represented July (two reports ago) said, "Labor market conditions remained stable as employment continued to grow modestly."
Which of these two reports sounds stronger, July or August? July said "stable" and August said "tight." August conditions, according to the majority of Fed officials reporting into the Beige Book saw the labor market get stronger (tighter). How do we know? They said it this time but didn't say it the time before.
What's surprising about that? The NFP number right? Even though the NFP number has the world believing that the US slowed month-to-month, the Beige Book would have you believe that Fed officials really feel the market become stronger from July to August.
If the NFP looked like the Beige Book sounds on jobs, the consensus would be for a rate hike in September. Could it be that NFP is having the street lean the wrong way? If it is it is a major risk to markets.
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