The Market Today
FOMC Minutes Cement Market’s Expectation for a December Rate Hike
by Craig Dismuke, Dudley Carter
Today’s Calendar – Quiet End to a Holiday-Shortened Week: Today’s economic calendar is extremely quiet. The only reports scheduled for release are Markit’s November PMIs at 8:45 a.m. CT. The manufacturing index is expected to rise slightly while the services index is expected to be unchanged from October.
Wednesday’s Trading – FOMC Minutes Solidified Lower Yields, and a Weaker Dollar: The market response to the November Minutes reflected an overall dovish interpretation to the heavy dose of concern from officials around the ongoing inflation weakness (more below). However, most of the day’s net moves were already well underway by the time those Minutes were released. Treasurys rallied early pushing yields lower out of the gate and the Dollar began to drift after early morning economic reports on durable goods and consumer confidence were mixed. Although mixed, those reports wouldn’t have seemed to warrant the degree of the moves exhibited in the morning session. Instead, the morning caution may have been in anticipation of the Fed document. After the Minutes were released and showed the widespread concerns around inflation, the Dollar and Treasury yields moved to their lows of the day. On the day, the 2-year yield fell 4.5 bps marking its biggest single-day drop since early September. The 10-year yield fell 3.7 bps to 2.32%. The Dollar dropped 0.78%, the most since late June.
FOMC Minutes Keep A December Hike Likely, But Flag Inflation Weakness as a Growing Concern for the Committee: As expected, the Minutes from the FOMC’s November meeting set the stage for another rate hike when the Committee gathers again in December. The Minutes showed that “many participants thought that another increase in the target range for the federal funds rate was likely to be warranted in the near term if incoming information left the medium-term outlook broadly unchanged”. The economic assessment was a positive one and persistent strength in the labor market has continued to push the unemployment rate further below the Fed’s longer-run forecast. But as expected, there remains a confusion about what has driven inflation lower this year and this uncertainty raises question for the rate path further out. The markets were more focused on the inflation uncertainty and possible implications for monetary policy; the overnight rate implied by fed funds futures further out, longer Treasury yields, and the Dollar all declined. Some at the Fed would like to wait to hike again until inflation turns higher but the slow and steady decline in the unemployment rate below the Fed’s longer-run target is making that waiting game increasingly uncomfortable for others. The next few months could be telling in what is stronger: the Fed’s faith in the Phillips Curve or their fear of potentially forcing inflation lower.