The Fed is on the hot seat
Published Date 9/21/2018
Very early this morning the 10-yr was trading unchanged from yesterday and yesterday it ended unchanged from Wednesday. Didn’t last long. By 9:00 am EST the 10-yr yield at 3.08% was up 1 bps and MBS prices dropped -8 bps from yesterday’s close. There are no economic releases scheduled today. US stock indexes in pre-open futures trade continued to gain — at 7:00 am the DJIA added +40, and by 9:00 am it was up +90.
US and global equity markets are in a huge feeding frenzy. One question feeding the markets is that if the Fed is going to continue increasing rates, is this confirmation that growth will continue to increase and profit and earnings will be sufficiently high enough to offset the increased borrowing costs that higher rates will cause?
There is nothing of substance for markets now until next Wednesday, when the FOMC meeting concludes and the Federal Fund is increased by 0.25%. That is a given. What is still in the air, however, is how the policy statement will frame the future of growth and how the Fed may react for future increases. The consensus has grown that the Fed will move rates higher again at the December FOMC meeting. In addition to his statement, Jerome Powell will hold a press conference after the meeting on Wednesday. To add more to the events Wednesday, the Fed will release its quarterly update outlook for growth, employment and inflation going out to 2021.
The Fed is on the hot seat; move too quickly and too high and risk pushing the economy into recession, or too slowly and send inflation rapidly higher that would surely dislocate markets and also lead to a more serious economic slowdown. Here is the discussion that has been going on for a few months; what will occur if the yield curve inverts where short-term rates are higher than long term rates? This is a real possibility if the Fed moves too hard and too quickly. Past history of an inversion reveals that it is a precursor to recession. The idea that these are much different times and circumstances is the argument that inversion won’t follow history. The three recessions since the mid-1980s, in fact, have all occurred after the unemployment rate and the Fed’s policy rate inverted the curve. Any answer to the debate will be in hindsight, and for all the discussion investors apparently don’t care these days.
At 9:30 am the DJIA opened +84, another new record. NASDAQ added +1, and the S&P bumped up +7, also another new high. The 10-yr note was at 3.08%, up +0.5 bp. MBS prices dropped -3 bps from yesterday’s close and added +6 bps from 9:30 am yesterday.
World shares hit their highest levels in more than 6 months today, as investors took the view that the latest exchange of tariffs between the United States and China may be less damaging than initially feared. In the meantime, President Trump isn’t backing down. His latest comments suggest otherwise, but markets stubbornly deny the war will last long.
Looks like a quiet day in the rate markets. Technically in overbought levels, the 10-yr yesterday and so far this morning remained mostly unchanged. The wider outlook presently is that rates will continue to increase and most all of our models and technical studies confirm those outlooks.
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