The U.S. Federal Reserve is still in talks of a possible rate hike. The most recent comments made by Janet Yellen at the Jackson Hole summit indicated that interest rates would be raise during the Federal Open Market Committee (FOMC) meeting in September 2016. Moreover, market participants have spent a lot of time dissecting Federal Reserve Chairwoman Janet Yellen’s statements during the annual summit in Jackson Hole, Wyoming. Now, online trading activity should pick up as the summer doldrums comes to an end.
U.S. Second Quarter 2016 GDP
The preliminary second quarter U.S. gross domestic product (GDP) was reported in late July, and the U.S. grew less than expected during the second quarter. GDP only increased at an annualized rate of 1.2%, while the consensus estimate was 2.6%. Some economists believe this GDP growth rate may be unsustainable due to the increase in housing prices and fluctuations in the labor market, which could lead to higher savings and lower consumer confidence. In turn, these catalysts could cause the GDP growth rate to fall. However, some economists were proved wrong with the actual second quarter GDP release.
The actual second quarter U.S. GDP numbers came out in late August and the numbers came in soft. The quarter over quarter change in the level of real GDP was just an annualized rate of plus 1.1%, which was down 0.1% from the advance estimate. However, consumer spending grew at a strong pace of over 4% during the second quarter, which was the second-fastest quarterly pace in 2006. The increase in consumer spending during the second quarter was primarily attributed to the spending on durable goods. Moreover, the strong economic conditions led to stronger consumer sentiment. Below is a chart of the quarter over quarter GDP change, as released with no changes.
As the chart shows, GDP growth has been slowing since the second quarter of 2015, which may force the Federal Reserve to hold off on interest rates in the September and November meetings.
U.S. Jobs Reports June, July and August 2016
The U.S. Employment Situation reports came in better than expected in June and July 2016. The economy added 287,000 jobs in June, while analysts expected an addition of 180,000. This strong jobs growth in the month of June came after a jobs report in May, when the economy only added 38,000 jobs. The unemployment rate remained below 5%, at 4.9%, in June and showed signs of a strengthening job market. In July, the economy added 255,000 jobs, while economists were looking for the economy to add 185,000 jobs. Moreover, the unemployment rate remained stagnant at 4.9%.
Now, investors and the Fed were looking for a third consecutive month of better than expected jobs and wage growth. However, the August employment situation came in lighter than expected, which caused some market participants to be joyful. The U.S. economy added 151,000 jobs, while the consensus estimate was 175,000. Additionally, the unemployment rate remained unchanged at 4.9%, while economists expected a small shrinkage to 4.8%. This weak jobs report should cause the Fed to wait until December to consider an interest rate hike.
U.S. Dollar and Fed Rate Hike
Eyes are on the next FOMC policy meeting being held on September 20-21, 2016. The next interest rate decision will fall on second day of the policy meeting, and investors should watch the currency markets based on any decision the Fed makes. If the Fed raises rates, this indicates a bullish U.S. dollar trade and investors may want to consider shorting currency pairs, such as EUR/USD, CHF/USD, JPY/USD and GBP/USD. If the Fed increase the funds rates, the value of the U.S. dollar will increase since higher interest rates could be earned, which attracts more investments. Although it is unlikely the Fed will raise rates in September, comments of a rate hike should increase the volatility in currency markets.
Now, on the other hand, if the Fed makes comments of not raising rates in 2016, currency traders may want to take a bearish stance on the U.S. dollar. Consequently, possible positions are getting long the EUR/USD, CHF/USD, JPY/USD or GBP/USD.