Rate-Hike Expectations Are Bubbling…Again
James Picerno | Oct 13, 2016 07:15AM ET
The prospect for a Fed funds futures. No change is expected at the November 1-2 meeting, however.
Yesterday’s release of FOMC minutes for September 20-21 fueled speculation that the central bank is close to raising its policy rate. “Among the participants who supported awaiting further evidence of continued progress toward the Committee’s objectives, several stated that the decision at this meeting was a close call,” the minutes reported.
“The probability of a rate hike is very likely by the end of the year,” advises Randall Kroszner, a former Fed governor who’s currently an economics professor at the University of Chicago. “Unless there’s some major shock, I think they’re pretty much on track to move in December.”
Meanwhile, let’s look at the numbers from several perspectives for additional perspective, starting with key Treasury yields. As the first chart below shows, an upward bias is conspicuous these days in the policy sensitive 2-year yield and benchmark 10-year yield.
The 2-year yield ticked up to a new four-month high yesterday (October 12), reaching 0.87%, based on daily data from Treasury.gov. Ditto for the 10-year yield, which touched 1.79% on Wednesday.
Note, too, that the effective Fed funds rate perked up to 0.41% on Tuesday (October 11) to a three-month high. Is this an early sign that the Fed is laying the groundwork for a rate hike?
Policy certainly looks relatively tight via the year-over-year change in real M0 money supply. This measure of the monetary base (aka high-powered money) has remained negative for six straight months through August—the longest stretch of contraction in four years for the monthly data.
Get The News You Want
The market’s outlook on inflation is ticking higher lately, based on the yield spread between nominal and inflation-indexed Treasuries. The implied inflation rate via the 5-year maturities, for instance, is currently at 1.51%–the highest since May.
Meanwhile, the 2-year yield’s upside momentum appears to be strengthening. The rate’s 50-day exponential moving average (EMA) recently broke above its 100- and 200-day EMAs for the first time since the summer.
The 10-year’s EMAs, however, are still reflecting a downside bias, although it appears that the tide may be turning.
If the Fed is still on the fence about the timing of the next rate hike, the incoming economic data may be the factor that shifts sentiment decisively, one way or the other. The next major release: tomorrow’s retail sales data for September.
Based on Econoday.com’s consensus forecast, the numbers are on track to boost the odds for a rate hike. Economists are looking for a strong rebound in spending: +0.6% for the monthly comparison vs. a 0.3% loss in August. If the forecast holds, the year-over-year pace will firm up to a 2.7% advance, the highest since June.
But there’s a whiff of deceleration in the air when it comes to projecting third-quarter GDP, which is scheduled for release on October 28. The Atlanta Fed’s GDPNow model is estimating (as of October 7) a healthy rebound to a 2.1% pace (seasonally adjusted annual rate), which is roughly double the gain in each of the previous three quarters.
But as the chart below shows, the Q3 estimates have been losing altitude. It’s unclear if the slide will continue, but if it does the current outlook for expecting a rate hike will suffer.
The bottom line? To borrow the phrase from the latest Fed minutes, it’s still too close to call.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.