Fed's Liftoff: A Shift In Sentiment

Friday’s US jobs report combined with the September FOMC decision has significantly altered market expectations for the timing of the first hike by the Federal Reserve. The Fed Funds futures implied probability of a 2015 liftoff has dropped below 30%.

Source: barchart

In fact the expected trajectory of the rate hike probability has shifted in a similar fashion that it did after the September FOMC meeting.

Source: @MishGEA

We see this shift in sentiment reflected in the 2-year treasury rates move on Friday.

Market participants are becoming uneasy about a potential loss of momentum in US labor markets. This latest concern comes on the heels of a number of other headwinds (discussed here) that resulted in the FOMC’s September inaction on rates and weaker growth projections.

The softness in the labor markets is not limited to the latest payrolls report, which missed economists’ forecasts. This year for example has been marked by downward revisions in estimates, as the Labor Department consistently overestimated job creation.

Source: Floating Path

Another indicator that analysts have been focused on is the civilian labor force participation – which started declining again after leveling off for about a year.

To make matters worse, the wage growth acceleration many economists (including the Fed) have been promising never materialized (at least not yet). US wages continue increasing at around 2% per year and the concerns around wage pressures seem to have been overblown.