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Analysis: Bill Gross bets on US rate hike in September, but other Wall Street players say not so fast

PUBLISHED : Saturday, 03 September, 2016, 12:52am
UPDATED : Saturday, 03 September, 2016, 12:52am

Bill Gross says August’s jobs data ensure the US Federal Reserve will raise interest rates this month. Pacific Investment Management Co. (PIMCO), his former firm, says on the other hand the central bank will wait.

Bond traders are on the fence.

“September is on -- I don’t think it’s 100 per cent on, but I think it’s close to 100 per cent,” Gross, manager of the Janus Global Unconstrained Bond Fund, said in an interview with Bloomberg Radio. “If these types of jobs don’t do it, I’m not quite sure what does.”

Pimco, the firm Gross co-founded and left in 2014, disagrees.

“It’s kind of a weak report across the board, so it doesn’t change the view we’ve had that September is very unlikely,” Scott Mather, chief investment officer of US core strategies and a managing director at Pimco, said in a Bloomberg Radio interview. “But then of course that makes December much more likely after that.”

Fed’s Yellen suggests US rate liftoff increasingly likely as economy picks up steam

The remarks come after a Labor Department report on Friday showed employers added 151,000 positions last month, following a 275,000 gain in July that was larger than previously estimated. The median forecast in a Bloomberg survey called for 180,000 additions. The jobless rate and labour participation rate held steady, while wage gains moderated and hours worked were the lowest since 2014.

US jobs grow at slower pace in August as economy nears full employment

Mixed US economic data in the past week pushed traders to pare wagers on a 2016 hike after Fed Chair Janet Yellen said on August 26 the case for higher rates had strengthened. Minutes from the central bank’s July meeting showed policy makers divided on the matter.

Futures prices indicate about a 32 per cent chance of a September move, according to data compiled by Bloomberg, down from 36 per cent before the report’s release. The calculation is based on the assumption that the effective fed funds rate will trade at the middle of the new Federal Open Market Committee target range after the increase.

By contrast, Goldman Sachs economists led by Jan Hatzius said the Fed is now more likely to hike in September. They see a 55 per cent chance that the Fed moves this month, up from 40 per cent previously, according to a note published Friday. The job gains were “just enough” for a majority of policy makers to support the move, they said.

Futures traders see about a 61 per cent chance of a move by December, little changed from before the jobs report.

Mohamed El-Erian, chief economic adviser at Pimco parent Allianz SE and Gross’s former colleague at the firm, said the data further complicate this month’s decision.

“This is going to put the Fed in a really tricky position when they next meet in September,” El-Erian said in an interview on Bloomberg Television. “This is going to ultimately come down to one fundamental issue: how worried are Fed officials about the collateral damage and the unintended consequences of a protracted period of low interest rates? If they are as worried as I am, then this report is a green light to hike. If they’re not worried, then they’ll wait.“