Markets Deal with Increased Uncertainty
Prior Week Summary
A strong risk-off sentiment took hold last week on the back of declining equities, commodities and bond yields. The weakness in oil prices which began in early October has now reached roughly $20 per barrel, which may temper the recent increases in headline inflation coming from higher energy prices. Renewed uncertainty relating to the outlook for Brexit also factored into the week’s market volatility that ultimately brought the 10-year Treasury note yield down 12 basis points on the holiday-shortened trading week. It will be interesting to watch how market strategists and forecasters approach the potential for a hike at the upcoming December Fed meeting, which as of this writing is no longer a foregone conclusion. According to the CME’s Fedwatch tool, the implied odds of a 25 basis point hike in December have declined from 83% to roughly 63% currently. It would only take a decline of roughly 4 basis points in the relevant forward rate for market pricing to imply a 50/50 probability of a pause in the current trajectory of rate hikes, which seems relevant from a market psychology perspective.
On the economic front, consumer prices matched consensus expectations for a gain of 0.3% while real average hourly earnings increased 0.7% on a year-over-year basis. Excluding food and energy prices, the core consumer price gauge rose 2.1%. Retail sales easily beat expectations, rising 0.8% in October. The gain represented the largest in five months as consumers spent on automobiles and building materials.
The Look Forward
The market will enjoy a relatively busy few days before investors pause to celebrate Thanksgiving toward the end of the week. Before the holiday, investors will look forward to updates on the housing markets, durable goods and consumer sentiment.
Sources: Bloomberg Finance L.P., (Treasuries) Chatham Financial (Swap Curves), FHLB Boston, Chicago, Dallas, Des Moines for FHLB Advance Rates. Wells Fargo Brokered CD Indications.
Market Implied Policy Path (Overnight Indexed Swap Rates)
Source: Chatham Financial
Fixed Income Snapshot
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