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World Week Ahead: Will the Fed wait?

Monday 5th September 2016

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Following Friday’s weaker-than-expected US jobs data, investors will eye further signs to underpin bets that the Federal Reserve won’t raise interest rates at this month’s policy meeting.

With the Fed now seen on hold this month, investors will also watch Bank of England Governor Mark Carney’s testimony before lawmakers on Wednesday, and a press conference by European Central Bank President Mario Draghi following the central bank’s Governing Council meeting on Thursday.

Last Friday a US Labor Department report showed nonfarm payrolls rose by a lower-than-expected 151,000 jobs in August, following an upwardly revised 275,000 gain in July. The unemployment rate was unchanged at 4.9 percent as more people began looking for work. 

“Overall, it still looks like the job market is doing well,” Michael Feroli, chief US economist at JPMorgan Securities in New York, told Bloomberg. Even so, “this probably takes a little bit away from the case for a September move,” with the shorter workweek “a bit of a concern.”

The number of hours worked dropped by 6 minutes to 34.3 hours.

Feroli expects the Fed will raise rates in December.

In recent weeks Fed officials had flagged that a rate hike was possible at this month’s Federal Open Market Committee two-day gathering starting September 20. But recent weaker-than-expected US economic data including last week’s factory activity have reduced bets that policy makers will move this month.

Economists polled by Reuters on Friday now assign a median probability for a rate hike at this month's meeting of 35 percent. That probability rises to 63 percent by year-end.

“Bulls like me have been avenged,” Guillermo Hernandez Sampere, head of trading at MPPM EK in Eppstein, Germany, told Bloomberg. “The Fed won’t do anything, and the figures were good enough to calm down the nervous investors that believed in a strong slowdown.”

But opinions vary. Goldman Sachs Group economists said they see a 55 percent probability of a rate hike this month, and Janus Capital’s Bill Gross also said the Fed is likely to move in September, according to Bloomberg.

On Friday the Dow Jones Industrial Average rose 0.4 percent, as did the Standard & Poor’s 500 Index and the Nasdaq Composite Index. Europe’s Stoxx 600 Index climbed 2 percent on Friday.

Wall Street advanced for the week, with the Dow gaining 0.5 percent, as did the S&P 500, and the Nasdaq adding 0.6 percent.

Today US markets are closed for the Labour Day holiday—the unofficial end of the Northern Hemisphere’s summer.

This week’s US data will arrive in the form of reports on the PMI services index, ISM non-manufacturing index, and the labour market conditions index, due Tuesday; the Fed’s Beige Book, due Wednesday; and weekly jobless claims, due Thursday.

Investors will watch Fed officials for any fresh hints on the timing of a US hike. San Francisco Fed President John Williams speaks on Tuesday, Kansas City Fed's Esther George holds a talk on Wednesday while Boston Fed's Eric Rosengren speaks on Friday.

Wall Street might see more volatility this month.

"If you look at September on average, it's a bad month," Brad McMillan, chief investment officer for Commonwealth Financial Network, told Reuters. "There is a real good chance that the low volatility that we have seen in August hasn't just disappeared, it's just been storing up for September.”

Also in focus is Apple, which is set to hold a keynote event on Wednesday where it is expected to unveil its latest iPhone 7 model.

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