Bond traders are convinced that the Federal Reserve is going to raise interest rates at its December 13 meeting–according to the CME Fed Watch calculator, the odds of a December 13 interest rate increase are 96.7%. But bond traders are also convinced that the Fed won’t raise rates four times in 2018 as it has signaled. Two rate increases and that’s it, the market is saying
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.
You wouldn’t know that there was anything to worry about from the U.S. stock market. So what that the President has threatened to shut down the government unless Congress funds The Wall. So what that the tax cuts so near and dear to CEOs won’t happen unless there is a budget or some stop gap funding measure by October 1. So what the Federal Reserve refuses to take another interest rate increase off the table. But if you look at the bond market, you will see signs of concern.
Banking stocks continued their recent drift. The Financial Select Sector SPDR (XLF) closed the day at $23.25. That’s below the sector’s May 25 close at $23.62. The sector, one of the best performing sectors in the market since the election, has been a key to moving the Standard & Poor’s 500 upward earlier in 2017. The KBW Banks Index had been up 32.2% from the election to the beginning of March, but is now ahead just 20%
The Bank of Japan threw the country’s financial sector a bone today–not much more than that certainly. At its regular monetary policy meeting the Japanese central bank said it would keep its short-term policy rate at a negative 0.1% while working to keep the yield on the 10-year government bond near 0%
Next week it’s actually the Bank of Japan meeting rather than the Federal Reserve’s that has the most power to move financial markets in the short run. Partly that’s because the Federal Reserve’s isn’t likely to do anything at its September 21 meeting. But partly its because there is real uncertainty about what the Bank of Japan might do at its September 21 meeting. The worry is that the bank will decide to cut back on purchases of long-term bonds and at the same time reduce short-term interest rates further
Today financial markets are anxiously wondering if they need to rethink the assumption of an endless supply of stimulus. Besides yesterday’s non-move and rhetorical silence from the European Central Bank, today the market is reacting to remarks from the Boston Federal Reserve Bank President that waiting too long to raise interest rates would threaten the U.S economy. And to the possibility that the Bank of Japan would like to see higher long-term interest rates
