Goldman Reverses September Shift as Bond Traders Pare Fed Wagers

What Fed Beige Book Suggests About the Future of Rates
  • Futures show odds of a Fed hike this month near three-week low
  • Goldman sees 40% chance of September move, down from 55%

Bond traders pared the chance of a September Federal Reserve interest-rate increase to an almost three-week low as tepid economic data pushed Goldman Sachs Group Inc. to reduce the likelihood of a hike this month, reversing a revision made less than a week ago.

Treasuries were little changed as futures showed about a 22 percent probability of a September hike, down from 32 percent after the Labor Department’s August employment report on Sept. 2. Following data Tuesday that showed the U.S. service sector grew at the slowest pace in six years in August, economists at Goldman Sachs lowered the probability of a September hike to 40 percent from 55 percent, after making the opposite move on Friday.

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"With slightly softer data and less ‘time on the clock,’ a rate increase this year now looks a bit less certain," Jan Hatzius, chief economist at Goldman, wrote in a note to clients. "While this is just one indicator, the surprise was meaningful, and there may have been some Fed officials feeling lukewarm on a September hike to begin with." Goldman Sachs is one of the 23 primary dealers that trade directly with the U.S. central bank.

The central bank meets Sept. 20-21 after officials have stood pat on rates this year and twice pared projections for the path of increases. San Francisco Fed President John Williams on Tuesday said the U.S. economy is “in good shape and headed in the right direction,” without indicating whether he was leaning one way or another regarding a rate increase. He does not vote on monetary policy this year.

The benchmark 10-year note yield was little changed at 1.53 percent as of 6:44 a.m. in London, according to data compiled by Bloomberg. The price of the 1.5 percent security due in August 2026 was 99 22/32.

In Asian trading, Japan’s 10-year yield rose two basis points to minus 0.04 percent, short of expectations from earlier in the week it would climb to zero. Australia’s rose three basis points to 1.86 percent.

The Fed said the U.S. economy advanced at a modest pace in July and August, according to the latest Beige Book survey of business contacts published Wednesday in Washington. The report said labor-market conditions “remained tight in most districts” while overall consumer spending was little changed since the prior release.

Futures data show about a 52 percent chance of a Fed hike this year, down from 59 percent on Sept. 2. The calculation is based on the assumption that the effective fed funds rate will trade at the middle of the new FOMC target range after the next increase.

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