Dollar Slides After Goldman Capitulates, Pulls March Rate Hike Forecast

For months, Goldman's optimistic take on the economy drew raised eyebrows across both the sell and buy side, and nowhere more so than the bank's forecast for 4 Fed rate hikes in 2019, a number that is even higher than the Fed's own dot plot forecast which anticipates 3 rate hikes next year, not to mention the market's own implied prediction of less than 1 rate hike in the coming year.

Well, on Sunday night Goldman capitulated and in a note titled "The Ides of March" published late on Sunday by Jan Hatzius, the banks capitulated on its optimistic, and hawkish, projections, and now calls for less than a 50% probability of a rate hike in the March.

How does Hatzius justify this long-overdue capitulation? It's hardly the recent economic data, which while conceding that it has slowed down, Goldman notes that it has transitioned from "exceptionally strong to merely strong."
 

Relative to the turmoil in the financial markets, the economic numbers have been remarkably stable recently. Admittedly, jobless claims have risen and November payrolls fell somewhat short of expectations. But a report showing 155k new jobs and a decline in the (unrounded) unemployment rate to a new 48-year low of 3.67% is hardly weak in an absolute sense. Combined with the rebound in the November ISMs and firm consumer confidence readings, Friday’s report kept our current activity indicator (CAI) at 2.8% in November. This is down from a pace of 3.6% over the summer but still roughly 1 percentage point above the economy’s potential growth rate. In other words, our CAI implies that growth has transitioned from exceptionally strong to merely strong

Hatzius also observes a similar softening in inflation data, even if not one in wage growth; even so, "the wage and price inflation misses have been relatively minor, and we expect an increase in nominal wage growth to the 3¼-3½% range as well as a pickup in core PCE inflation to 2.2% by the end of 2019."

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Gary Anderson 4 months ago Contributor's comment

Well, maybe the ECB can avoid tariff wars and keep zero growth humming. Lol. But I doubt it.