The Fed Abides: A Global Focus On The Bond Market

Bank of England cuts rates while the American traders chew on domestic numbers and the Fed waits for European picture to clear.

The Bank of England cut rates this week and expanded its QE (quantitative easing) program, including the buying of corporate bonds, as preventative measures to offset likely weakness coming from the Brexit vote.

The actions were considered aggressive but not unexpected. Regardless of the fact that the BOE’s actions mean nothing to us, U.S. bond traders are using this as a reason to rally although traders shouldn’t get too carried away ahead of the Nonfarm Payroll number expected Friday.

The consensus for that payroll number remains around 175,000, give or take 10,000 or so. But after the last two payroll numbers economists shouldn’t have much confidence in their guesses. A number close to 100,000 would give the economic bears fodder for their slowing economy view, and a number over 200,000 would cause traders to wonder how long the Fed can resist tightening.

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Once the instantaneous reaction to the headline payroll number passes, traders will focus on revisions to prior months and hourly wages. While the jobs report is important in the grand scheme of all things economic, it will not matter to traders beyond the first few hours of trading after the number. The bond market is not trading on and the Fed is not basing decisions on our economy. If that was the case, the fed funds rate would be about 2%.

The focus of the Janet Yellen Fed is global, not local. And, the focus of the U.S. bond market is also global, not local. Until the picture in Europe comes into sharper focus, the Fed is unlikely to move and bond yields are unlikely to rise very far.

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Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

August 4, 2016

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