Fed officials are sharply divided on lift-off this year

Fed officials are sharply divided on lift-off. Three to four plainly want to get going this year, 3-4 plainly do not. Yellen, Fischer and Dudley sit in between with a bias toward pulling the trigger. Of course they - and everyone else for that matter - hedge their preferences with a nod toward cooperative data. And that's a problem because the data, which were never strong to begin with, are weakening as the weeks go by. 

First was the deeply disappointing September labor report. Actually, one should say 'Second' because August payrolls were even worse. Private sector payrolls - always what matter - grew by only 100k and 118 in Aug/Sep, some 145k short of what they averaged in 2014. It's not about volatility. It's about goods producing industries (GPIs), where payrolls have run 75k below average since March. That's seven months of consistently bad payrolls, so claims by some officials that "it's just one report" are far off the mark. 

The drop in GPI payrolls appears to owe to the drop in goods exports, 'second' for the sake of book keeping. Exports dropped by 7% between March and July and last week's August report showed another 3% drop. Exports are now down by 10% since February and, accounting as they do for 10% to GDP, this represents a serious drop in demand for US producers. Seven months of bad GPI payrolls, 8 months of falling goods exports - this isn't an all-of-a-sudden affair. It's the effect(s) of de-facto monetary tightening that occurred when the dollar went north in mid-2014. Unless the dollar reverses course - it already has to some degree - export and payrolls declines seem likely to persist. 

Third, in terms of recent data, were yesterday's retail sales. All categories advanced less than expected or fell by more than expected. Most importantly, control group sales (which exclude food, auto, gas and home improvement shops) fell by a tick instead of advancing by the three that consensus expected. Adding insult to injury, August control group growth was revised downward by 2 ticks to 0.2% (MoM, sa). The upshot is that on-year growth in control group sales is back below 3%. Knock off a point-and-a-half for (core) inflation and you're looking at real growth of only 1.4% YoY. Six months ago, real growth was closer to 2.25%. 

With the data clearly slowing and 3-4 Fed officials now firmly against lift-off this year, markets think the event increasingly unlikely. Fed funds futures now show a 30% chance of lift-off this year compared to 40% one week ago. Ten-year Treasury yields are back at 1.98%, compared to 2.30% in mid-September. The Great Moderation continues. Stay tuned.