The Treasury market has been taking a beating recently with traders and investors increasingly pricing in a December interest rate increase from the Federal Reserve. So today’s flat performance for the 10-year Treasury is actually a relief, especially considering that the Treasury sold $28 billion in 7-year notes today.
The odds of a December 13 interest rate increase, according to prices in the Fed Funds Futures market, have climbed to 81.4% today, September 27. That’s up from 72.5% odds on September 25 and from 37.8% odds back on August 25.
The big event this week, as far as financial markets are concerned, will be the Wednesday announcement by the “Big Six” Republican working group of a framework for the long anticipated Republican plan to cut taxes.
Even after the Federal Reserve said it aimed to raise interest rates once more in 2017 and then three times in 2018–and scheduled the drawn down of its balance sheet for an October start, the U.S. dollar has been unable to stage a convincing rally.
At today’s meeting of the Federal Reserve’s Open Market committee, the central bank kept its benchmark short-term interest rate unchanged at 1% to 1.25%, and announced that it would implement its plan to shrink its $4.5 trillion balance sheet by $10 billion a month beginning in October. The balance-sheet reduction would follow the framework released in June. All of that was expected by the financial markets. But there were some mild surprises in the Fed’s outlook for 2018.
On this Wednesday, when we get the September Dot Plot from the Federal Reserve, the key dots to watch are for inflation and interest rates, again. Wall Street opinion is starting to look for a lower inflation central tendency for 2018 of 1.5% rather than the 1.8% of June. On interest rates, thoughts are that the central tendency for 2018 might drop further at the high end of opinion to 2.5% or even lower.
Expect the Federal Reserve to stand pat on interest rates at the Wednesday, September 20, meeting of its rate-setting Open Market Committee. And for the Fed to announce the schedule for implementing the first stage of its plan to reduce the size of its $4.5 trillion balance sheet. Unless the Fed wants to toss a bomb into global financial markets–which would be totally out of character with the Janet Yellen Fed–the U.S. central bank will leave its benchmark interest rate in the current range.
Yesterday’s report of a slight uptick in inflation has pushed odds higher for a December interest rate increase from the Federal Reserve. The report, however, had no effect on odds in the Fed Funds Futures market for an increase at the Fed’s September 20 meeting.
The Standard & Poor’s 500 stock index closed down 1.54% today and the NASDAQ Composite fell 1.94%. Gold picked up 0.87%. The CBOE S&P 500 Volatility Index (VIX) broke above 15 again soaring 31.94% on the day. There was just too much for the markets to cope with today. On the fundamental front U.S. initial claims for unemployment dropped again in the last week
The Consumer Price Index rose 0.1% in July from June. CPI headline inflation is now running at a 1.7% annual rate, below the Federal Reserve’s target of 2% inflation. The core inflation rate, which excludes food and energy prices, rose 0.1% in July and is also up 1.7% year over year.
The U.S. economy added 209,000 jobs in July. Economists surveyed by Briefing.com were looking for 181,000 net new jobs in the month. Government statisticians revised the June jobs report up to 231.000 new jobs from 222,000. The official unemployment rate fell to 4.3% from 4.4% in June.
