Last week was a big week for trader psychology with multiple economic reports showing the US economy was not in free fall. The Fed Funds Futures market is pricing in a 43.3% probability of a rate hike by December 14, 2016.
Below is a quick breakdown of the better than expected economic reports last week.
US retail sales jumped more than expected.
I was not included in the Reuters polling, but I would have estimated 0.1 too.
What this means is that many traders realized they were a little too bearish after the crash of the May jobs report to 11K.
Retail sales including food services, excluding motor vehicle and parts, also crushed expectations to the upside.
Once again polling data showed that traders were a lot more bearish than was warranted.
Just when you think we have a pattern of good numbers, a big negative number messes with the pattern and keeps us all on our toes. Check out how weak the clothing and apparel component of the retail sales report is.
Core CPI rose perfectly in line with expectations, coming in above the Fed’s target of 2%. The Fed Funds Futures market immediately jumped from a 37% to 43.3% probability of a rate hike by December 14, 2016.
The only reason why the core CPI was not up more was that energy services pulled the number down. If we remove energy from the equation, the CPI would be up nearly 3.2%.
The CPI less energy services chart above suggests that once energy services deflation eases, we could see a rapid surge in the core CPI number. How much should the Fed let the Saudi Arabia attack against US oil producers impact their rate hike schedule? The Federal Reserve doesn’t want to wait too long to increase rates thinking that inflation is lower than what it is.
The Atlanta Fed’s Wage Growth Tracker shows wages rising +3.6% year over year. That’s a nice improvement in pay. The Fed watches this indicator very closely.
In light of last week’s economic reports, I think we can’t be so bearish on the economy. We are still in the worst six months of the year, and the stock market could crash anytime between now and the end of October. However, we are not as close to the edge of the recession cliff as we seemed to be on June 3, 2016, when the horrible May jobs report was released.
A big part of profitable trading is psychology and shifting with the economic data when it surprises to either the upside or the downside.