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Wall Street sees no rate hike in June; weak U.S. payrolls, ‘Brexit’ weigh

Posted in Uncategorized by dionrabouin on November 21, 2016

Wall Street’s top banks unanimously expect the Federal Reserve to leave interest rates unchanged this month, results of a Reuters poll showed on Friday, with bank economists pointing to a weakening U.S. employment scene and Britain’s pending vote on remaining in the European Union.

All 19 respondents to a poll of so-called primary dealers about the rate outlook said the Fed would leave its benchmark interest rate unchanged in a range of 0.25 percent to 0.50 percent when policymakers meet June 14-15. Most, however, still see the Fed raising the federal funds target rate range by 0.25 percentage point by the end of September.

The dealers, 23 large banks authorized to transact directly with the Fed, offered their views after Friday’s U.S. employment report showed the economy added only 38,000 jobs in May, the fewest for any month since September 2010.

“Our conviction has declined significantly since this morning,” said Tom Simons, money market economist at Jefferies and Co. “We had thought that we were on track for a rate hike in June, but the employment data this morning pretty much takes a rate hike off the table. It’s not impossible, but it seems very unlikely.”

The respondents assigned a median probability of 5 percent to a June rate hike, even as no dealer individually forecast an increase. The median probability for a hike at the Fed’s following meeting in late July was 34 percent, according to the survey.

Those odds largely mirrored those derived from interest rate futures markets, with CME Group’s FedWatch tool assigning a 6 percent chance for a hike in June and 33 percent for one in July.

A modest majority of dealers, nine of 15, expect no more than one Fed rate hike this year, with the median forecast for the midpoint of the year-end fed funds range at 0.63 percent. The Fed raised rates in December for the first time in nearly a decade and has held steady since.

The majority of economists in the survey said their conviction that the Fed might raise rates in two weeks had decreased in the last month. Most said Friday’s far weaker-than-expected U.S. job market data weighed heaviest in the downgrade of their rate outlook.

“The bottom line is the Fed needs more time and they need more data to determine what’s happening to the labor market,” said Omair Sharif, senior U.S. economist at Societe Generale in New York. “So I think that just pushes everything further back.”

In response to a question about the so-called Brexit vote, all 14 respondents said Britain’s June 23 referendum on whether to remain a member of the European Union would be at least a “somewhat significant” factor for Fed policymakers in deciding whether to raise rates this month. Nine of the 14 said the vote, seen as too close to call, would be either a “significant” or “very significant” factor.

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