Monday September 12

Stocks rose today in the aftermath of Friday’s selloff. The S&P 500 rose 1.5% to 2,159 and the Dow Jones rose 1.3% to 18,325. Utilities today rose 1.7% while the KBW Bank index rose 1%. A dovish speech by Lael Brainard may have contributed to optimism today that the Fed would not be as hawkish, which counteracts hawkish statements made last week which led to Friday’s selloff. Accordingly the probability of higher interest rates at the FOMC meeting next week fell to 22%. Yields in the US were mostly unchanged. The two year Treasury yield drifted down 1bp to 0.78% and the ten year Treasury yield was unchanged at 1.67%. The spread between 10s and 2s remained at 0.89%. Additionally the US dollar gave back some of its Friday gains. The euro finished at $1.1235. USD fell 0.9% against JPY to Y101.83. USD fell 0.5% against GBP to $1.3336. In Europe equities and rates both continued selloffs in the absence of any reassuring comments after the ECB on Thursday came across as hawkish. The 10 year bund yield rose 3bp to 0.04%. Oil prices were also modestly higher. WTI rose 0.4% to $46.07, and Brent rose 0.3% to $48.16.

Lael Brainard said today that the risks to the economy are skewed to the downside. By raising rates too early the Fed has more risks than if they wait too long. Brainard is a voting member of the FOMC who is typically dovish. Given where the market for Fed funds futures is currently, the Fed would really surprise investors and spark a selloff if rates were indeed to fall. She cited persistently low inflation, and suggested that the Fed should even wait for even further tightening of the labor market. She also expressed concern over the lack of room to maneuver in the event of an economic downturn. In response to these comments the two year Treasury yield fell to 0.78% compared to 0.80% before Brainard’s statement. Last week John Williams (San Francisco Fed) and Eric Rosengren (Boston Fed) made hawkish statements suggesting they were in favor of higher rates. Today Brainard, Dennis Lockhart, and Neel Kashkari all came across as dovish. Lockhart and Kashkari both said that they didn’t notice any urgency to the matter. Lockhart in particular said that the economy “was not incurring costs of waiting” that would encourage the Fed to raise interest rates quickly such as high inflation or asset bubbles. Lockhart and Kashkari currently are not voting members of the FOMC.

Investors are expecting that given the level of division between members of the FOMC, the Fed will more likely than not decide to leave the Fed funds rate unchanged at next week’s meeting. Jamie Dimon on the other hand is urging the Fed to raise rates, and today said that the Fed should just pull the trigger. Between FOMC officials some see a sense of urgency while others do not. The market has responded heavily to Fed speak in recent days and has been the primary driver of directional movements and volatility. There is a 57% chance of a rate hike by the December meeting. The Fed also meets in November, one week before the presidential election and is therefore not expected to do anything at that meeting. The Fed will release an updated dot plot next week as well.

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Monday September 12

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