Macro Commentary
Decisions, decisions. This week we received the last major data point before the Federal Reserve meets on September 16th to determine whether they will raise the Fed Funds rate for the first time in about 10 years. The US employment report missed on the headline number (173k jobs added month-over month vs. 217k expected) but the rest of the report was solid. In particular, hours worked increased, wages increased, and both calculations of unemployment (headline and the broader “underemployed” measure called U6) fell. All together, the market read it as another reason why the Fed may decide to take action in September, though the odds still remained around 1/3rd with the base case still being in December. The IMF and others have called upon the Fed to delay their action, but there is something to be said about restocking the “monetary ammo” since economic growth in the US seems resilient. It could be a small step in avoiding a circumstance where the market loses confidence in global central banks’ ability to manage the next downturn.
The European Central Bank (ECB) did its part this week too to demonstrate that they stand behind the European recovery. In the decision this week to leave the refinancing rate near an effective zero (0.05%), they also increased at the margin the amount of a particular bond issue they can buy as part of the quantitative easing program. In and of itself, it was a modest change but when combined with the dovish tone in the Q&A session leads the market to believe that the ECB will stand behind completing the program and would contemplate expanding it. Naturally, the euro weakened relative to the US dollar falling near 1.10 before ending the week a little above 1.11. While it will be a slow and steady pace, the divergence of the Fed and ECB’s actions support medium-term trend of the euro lower from here.