September rate increase less likely after US weak data

Otmane El Rhazi from The Bullion Desk.

The string of soft US data this week has slightly lowered the probability that the Federal Reserve will raise interest rates in September.

The second estimate of US first-quarter GDP came in at -0.7 percent, slightly better than the forecast of -0.8 percent but down significantly from 0.2 percent in the first reading.

In other lacklustre readings, the Chicago PMI plunged in May to 46.2 from 52.3 in April, while University of Michigan consumer sentiment dropped to 90.7 from 95.9 in April – the biggest decline since the end of 2012.

The CME Group’s FedWatch put the odds of a rate increase in September at 25 percent, a small decrease from probability of 27 percent last Friday.

The odds that the Fed will raise interest rates in December has fallen to 58 percent from 61 percent last week but there is now an 88-percent chance that it will act by the end of first quarter of 2016, up from 83 percent.

The members of the Fed’s policy board are locked in what has become an increasingly public debate on when will be the right time to raise interest rates, which have been near zero since December 2008.

At its last meeting, the Fed removed all calendar references in its forward guidance and said that recent economic weakness might be “transitory” in nature. This means that bank is now entirely dependent on data so a rate increase could happen at any future meeting.

 

(Editing by Mark Shaw) 

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