Wall Street dissenters emerge calling for May Fed rate increase

[SEATTLE] At least four of Wall Street's biggest banks are breaking with their bulge-bracket brethren, telling clients that the Federal Reserve will probably raise interest rates before June.

BNP Paribas SA, JPMorgan Chase & Co and Mizuho Securities USA Inc predict a hike at May's meeting, even though there's no press conference scheduled and it comes days before a vote in France's presidential election that could roil markets.

Jefferies Group LLC is alone among Fed primary dealers in calling for an increase next month, while noting that it's a close call between March and June. As for the rest of the 23 firms, most are set on June, though two point to September, a Bloomberg survey shows.

Mizuho has been in the May camp since December. BNP and JPMorgan pulled forward calls for a hike in notes published last week, citing signs of strength in inflation and jobs data.

Traders have already ramped up bets on a hike as soon as May, with futures signalling a 60 per cent chance of an increase by that month, up from 49 per cent at the start of February.

"The data is enough," Steven Ricchiuto, US economist at Mizuho, said in a phone interview.

While he initially pegged his May call to the prospect of more aggressive fiscal stimulus from the Trump administration, he's now looking to the president's focus on deregulation and jobs to help spur economic growth this year.

Personal-consumption data due March 1 may confirm that inflation has reached the Fed's 2 per cent target for the first time since 2012. After last week's consumer-price report, some analysts boosted estimates for the Fed's preferred gauge.

BNP, which previously anticipated two rate moves in 2017, both in the second half of the year, now projects three, in line with quarterly projections that policy makers released in December.

JPMorgan, which had expected the first hike of 2017 to be in June, continues to expect two increases this year, with the second in September. Mizuho anticipates moves in May and in the third quarter.

For JPMorgan and Mizuho, the May 7 run-off in French elections isn't an excuse for the Fed to forgo tightening May 3. A hike in May may help markets by offering more certainty on the path of policy, Mr Ricchiuto said.

The first round of France's election takes place in April and could spur market volatility if it looks like National Front leader Marine Le Pen, who's expected to advance, may be able to defeat her second-round opponent. Her prospects have garnered traders' attention in part because she's voiced policies that could threaten the stability of the euro area.

Nor is the lack of a May press conference a dealbreaker, Laura Rosner, senior US economist at BNP, said in an interview. The Fed would likely hold a special news conference to explain a rate increase then, she said.

Fed funds futures are pricing in about a 36 per cent chance policy makers will raise rates a quarter-point next month, data compiled by Bloomberg show. That compares with about a 60 percent probability of a move by May, rising to 74 per cent by the June meeting.

Mohamed El-Erian, chief economic adviser at Allianz SE, said Wednesday that traders are underestimating the odds of a move next month, which he pegged at 50 per cent to 60 per cent.

Mr El-Erian, who's also a Bloomberg View columnist, said February jobs figures to be released March 10, particularly wage data, will have a "notable impact" on the Fed's thinking at the March meeting.

BLOOMBERG