2016 Fed Rate Hike Still on the Cards?

Left for dead one month ago after the Brexit vote, upbeat economic data has opened the door to a 2016

Less than a month ago the idea of a Federal Reserve Rate hike in 2016 was dead in the water, resulting in large part from the instability and uncertainty wrought by the fallout of the Brexit referendum that convulsed markets in late June. Fast forward to July and virtually all US markets have completely rebounded to pre-Brexit levels – in the case of the US equity markets even surpassing previous highs.

While the Fed clearly opted not to hike rates last month, which came as little surprise to analysts and market participants, a tranche of new US economic data has once again put the prospect of a rate hike in 2016 on the table. Clearly May 2016’s NonFarm Payroll figure of 11,000 cast a huge shadow on any hawkish Fed activity, however this was promptly followed up by one of the strongest showings of the year out of the US economy.

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Say it ain’t so

A robust figure of 287,000 back in June represented a reversal, having been followed up by additional upbeat data in the weeks that followed. This begs the question: how likely is a 2016 rate hike? After plunging to roughly 15.0% probability, as calculated by Bloomberg, the latest figures show an uptick in the odds of a hike in 2016, swelling to 44.0% by years end.

Despite the increase in probability, the odds still remain much lower than a 2016 high of 80.0% seen back in February, as there still exists a number of headwinds as well as economic uncertainty. Probably the largest wildcard for US markets, including currency, equity and bond markets, notwithstanding the prospects of a Fed rate hike, are hinged on the 2016 electoral campaign, which could see Donald Trump emerge as the next President. Such a scenario threatens to completely throw any odds of a rate hike into flux, given the candidate’s policy proposals or rhetoric.

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