US: Lower September odds on lack of clear Fed signal, weak ISM – Goldman Sachs

Research Team at Goldman Sachs, suggests that as a result of the ISM miss and lack of clear signal from Fed officials, they are taking down their odds of a hike at the September 20-21 FOMC meeting to 40% (from 55%).

Key Quotes

“San Francisco Fed President John Williams advocated for raising rates “sooner rather than later”, but offered no new clues on whether the committee will be ready to act on this month. His speech followed non-manufacturing ISM index, which dropped sharply to 51.4 from 55.5 previously.

• San Francisco Fed President Williams Advocated for raising rates “sooner rather than later”, but did not stress the need to hike at the September FOMC meeting specifically. The lack of explicit guidance from President Williams tonight—or from other Fed officials in recent days—suggests FOMC participants are not especially concerned about the low odds of a hike discounted by markets (about 20% by our estimates). Before past rate increases, the minimum amount discounted by markets 15 days prior to the decision was about 70% (excepting February 1994), and we had expected communication from key officials after the August employment report if indeed they planned to raise rates this month.

• In addition, the ISM reported that its non-manufacturing index declined sharply to 51.4 from 55.5 previously. While this is just one indicator, the surprise was meaningful, and there may have been some Fed officials feeling lukewarm on a September hike to begin with. In these circumstances, one large surprise could carry a lot of weight.

• As a result, we are lowering our subjective odds of a rate increase at the September FOMC meeting from 55% to 40%. We are nudging up the odds of a rate increase at the December meeting to 30% from 25%, but taking the cumulative odds for at least one hike this year down to 70% from 80%. With slightly softer data and less “time on the clock”, a rate increase this year now looks a bit less certain, in our view.”