Daily Market Color

Hawkish Fed Comments from Jackson Hole Spur September Rate Hike Speculation

Friday as markets react to Fed Chair Yellen’s speech (along with Fischer’s comments) at the Jackson Hole symposium.  In her remarks, Yellen said “in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months”, appearing to set the stage for a hike in the near term, without committing to specific timing.  Traders initially interpreted the lack of explicit timing as dovish before Fed Vice Chair Fischer answered affirmatively in an interview when asked if market participants should be looking for higher borrowing costs in September, and possibly for two hikes this year.  The futures market currently implies a 38% chance of a hike in September and a 62% chance in December, up from 32% and 57%, respectively.
 
Aside from all the attention being paid to the Jackson Hole symposium, US economic data remains in focus ahead of next Friday’s release of the August payrolls report.  Data released today showed GDP expanded at a 1.1% annual rate in the second quarter, in line with expectations, but below the 1.2% rate originally reported last month.  Growth in consumer spending was revised slightly higher, but was offset by larger declines for residential construction and state and local government spending.  Economists expect overall growth to rebound in the second half of the year as a healthy labor market boosts consumer spending and output gets a boost from business investment.  A separate report showed US corporate profits increased for a second straight quarter, rising 4.9%. 

All three major US stock indexes are currently down between 0.10% and 0.50%, while Treasury yields and swap rates are 1-5 bps higher across all major maturities in a bear flattening pattern.  Both WTI and Brent crude are currently trading close to unchanged the day after Saudi Arabia cast major doubts on the prospect of their freezing oil output.

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