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Gartman: 'All but impossible' for Fed to raise rates

The author of The Gartman Letter believes declines in wage growth and the work week will keep the central bank on pause when it meets Sept. 20-21.

If there was any question whether the Fed would hold off on hiking interest rates this month, Friday's jobs report may have put it to rest.

Nonfarm payroll growth in August missed market expectations, rising just 151,000 against estimates of 180,000.

For Dennis Gartman, investor and author of the widely followed Gartman Letter, the news was even worse than the headline suggests.

In addition to the sharp dropoff from the summer's previously robust job-creation, August saw a slowdown in the rate of increase for average hourly earnings, and a decline in hours worked.

In his Monday letter, Gartman said the one-tenth decline in hours worked from 34.4 hours to 34.3 hours was "the rough equivalent of actually losing at least 200,000 non-farm payroll workers in the period in question."

The work week decline, reported in the last monthly payrolls release before the Federal Open Market Committee meeting on Sept. 20-21, effectively scotched a rate hike, he said.

"This is the number that caught us off, and this is the number that we think shall make it all but impossible for the FOMC to vote to raise the (overnight) fed funds rate at the (September) meeting," Gartman wrote.

Dennis Gartman
David Orrell | CNBC
Dennis Gartman

His position is in line with trader expectations. There's just a 21 percent chance of a September rate hike, according to the CME's calculations of fed funds futures contracts, which point to a 0.42 percent rate in September. The market expects the rate at the end of the year to be 0.53 percent, compared to the current level of 0.4 percent.

Goldman Sachs economists, though, believe the market has it wrong. The firm asserts that Fed Chair Janet Yellen signaled, in her speech at the Jackson Hole, Wyoming summit on Aug. 26, that the bar was low for the August jobs report and that the central bank stood at the ready to resume hiking rates.

The Fed last moved in December, at which time members signaled that four rate hikes were likely in 2016. However, the FOMC has been on pause since then and in June reduced the forecast to two increases this year.

"Back in the spring, the committee was ready to go in June or July, but then the weak May payroll report and the Brexit vote interfered," Goldman economists Zach Pandl and Jan Hatzius said in a note to clients. "Now both of these worries have dissipated, the labor market has made further headway, financial conditions are easier than they were three months ago, and no major new risks have appeared."

But Gartman believes the Fed has to worry about more than the jobs report. Recent data have indicated a softening in the economic outlook, he said.

Specifically, he pointed to the monthly trade deficit, which actually was less than forecast in August. However, Gartman pointed out that the dip to $39.5 billion came primarily due to a surge in agriculture exports that won't be sustained, and occurred in conjunction with a 0.8 percent drop in imports led by a decline in consumer goods.

He also pointed to the 1.9 percent gain in factory orders that, while reversing a decline in July, was below Wall Street expectations.

Still, third-quarter gross domestic product looks comparatively robust. The Atlanta Fed expects economic growth to clock in at 3.5 percent, which would be a relief after the first half of the year averaged just 0.95 percent.