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The September rate hike speculation was mostly driven by the slew of suddenly hawkish Fed member commentary while actual economic data over the past few weeks has mostly missed expectations. But the combination of the ISM Manufacturing PMI dropping into contractionary territory and non-farm payrolls missing expectations should have likely put the September rate hike to bed. The base case for the Fed is for a hike in December, but there are only three more NFP reports until then and it only takes one more major miss like we saw in May to see that pushed out into 2017.
Of course, bad data means the underlying health in the economy is not good, and this ultimately drives earnings performance. And this does put investors in a contradictory situation as to whether they should be focusing on rates settings or the underlying economy. This indecision certainly seemed at play during Friday’s session, as stocks initially surged on the NFP miss, but then proceeded to pare back some of those gains. A similar phenomenon was seen in the DXY US dollar index, which dropped as low as 95.14 after the release, but ultimately closed Friday’s session higher by 0.2%. And US bond yields also closed the session higher with the ten-year yield rising by 2.7 basis points and the 30-year rising by 4.1 basis points.