Rate Hiked as Expected–Markets a Bit Confused

As we expected the Fed hiked the Fed Funds rate–looking at the bright side that means when we open our Fidelity account on the 1st of the month we will have a tidy payment for our money market holdings.  It seems like we can never stay fully invested–and then on the 1st we would see a 50 cent interest payment for “ready reserves”–now we might see a $100 or $200 depending on our cash on hand–it is small but welcome.  As of yesterday the Fidelity money market paid us 1.42%–we should see a hike in the next few days.

I think the markets are a bit confused about the interest rate situation.  The Fed released a statement that indicated the economy is stronger in their eyes than it was 3 months ago.  This piggybacked on top of the strong PPI released this morning would seem to indicate further rate hikes ahead.  The various talking heads had been debating whether there would be 2 more hikes or only 1–we will predict right now that a September rate hike will happen.  We are highly scientific – gut feel.  Both the CPI and the PPI are running kind of hot right now.  GDP Now is predicting a 4.6% in GDP growth for the 2nd quarter—we think this is poppycock–but even if it is 3.6% it is pretty damned good.  We already know that employment is running hot and the latest JOLTS (Job Openings and Labor Turnover report) report showed more job openings than available people to fill them.  Seems logical to believe that only a black swan event could derail the next rate hike.

As far as a rate hike in December–totally not predictable right now.  If we get long rates (7, 10 and 30 year) moving higher–at least to the 3.25% we expect we certainly can see further slowing in the housing market and likely will begin to see slowdowns in auto markets etc., but really it simply isn’t predictable at this point in time.

So at the same time the Fed is making noise on economic strength and GDP Now is predicting 4.6% GDP growth the yield curve flattened further.  The 10 year bounced off 3% before settling at 2.98% (up 2 basis points), while the 1 yr, 2 yr, 5 yr etc all moved higher by 4-5 basis points.  The difference between a 2 year t-bill and a 10 year treasury is a measly 39 basis points.

So all of this leads to a modest tumble in stocks.  Even though the hike met expectations the talk of strength spooked equity traders a bit–we think there could be interesting trading in both the stock and bond markets in the next few days.  We are also aware that the ECB could announce a winding down of their quantitative easing program on Thursday–so even more “fun” could be on the horizon.



16 thoughts on “Rate Hiked as Expected–Markets a Bit Confused”

  1. Without the impact of rate increases being factored in as of today; you can get better money market rates if you have margin on your accounts and don’t use a “sweep” account. You can buy/sell stocks and then do transfer before 4pm into your sweep account without any margin interest charges.
    VMMXX from Vanguard is paying 1.96% $3,000 minimum
    FZDXX from Fidelity is paying 1.86% but you need $100,000 minimum
    SWVXX from Schwab is paying 1.77% do not believe you need a minimum.

    During 2018, Vanguard’s rate have been about the same as the 90 day Tbill as they currently are.

      1. If you do not have margin on the account, then you have to sell the mutual fund overnight and wait until the next day to buy sell stock/ETF’s/CEF’s. This may cause you to lose out on getting what you want at the price you want. If you have margin on the account, you can buy immediately and then sell the money market overnight at no charge.

    1. SteveA–looks like everyone is near the same (plus or minus 10 basis points). I just take the easiest option as I am kind of lazy (really just too busy to worry too much about the very last basis points).

      Thanks for the info

      1. Tim, I know you enjoy my goofy trades so I will tell you my latest. After 4-5 years of off and on fruitless chasing I snagged WELPM today at a bit over $113 (last trade today went off at $118) A rare liquidity event happened where somebody sold 1000 shares as there are only about 40,000 shares outstanding for this old late 1940s noncallable preferred from Wisconsin Electric. Even after a 11% drop from Aprils last trade it still yields a lowly ~ 5.3%. Stays strong in down times though and even was near $100 par in late 90s when 10 year was around 5%. This one goes into the collectible sock drawer.

        1. Grid–I hope someday to have the time I need to watch the illiquids closer–one of these days I will find the time–retire from my work.

          1. I bought this one on the golf course with my phone, lol…Retirement is good time, though I do a little PT work. Make sure you have a retirement plan to occupy your time (such as this website and stock trading) or you will be wanting a job again. ?

  2. nothing seems to matter till it does..I just think money goes into 401ks etc and they allocate, combined w share buybacks, up we go.. even specs like my GNL and Tim’s WSR.. movin up…

    Tim do you use FIDO’s SPRXX or one of the gov’t mmkts? I show a 7 day yield on SPRXX at 1.71%. bests, Bea

    1. Hi Bea–I just use the FDRXX which is Fidelity Government Cash reserves. It is the easiest. Yes I had checked Tuesday and it was 1.41 or 1.42 and with the hike yesterday we get a “raise”

  3. So, let me get this straight…lending money to Uncle Sam for 10 years only gets me an additional 39 basis points more than if I lend the same amount for 2 years? That’s financial lunacy, who wants to do that? How long before the flattening of the yield curve takes this economy for a downward turn?

    1. Artemisa–yes you get virtually nothing for committing to an extra 8 years–who the hell would do that? I guess somebody is doing it–and they think the economy is heading south in the not too distant future. Long rates are totally in conflict with GDP Now and the Fed statements. Somebody is wrong–we’ll see I guess.

    2. The website gurufocus.com has a good chart on the yield curve- it is under the “market” tab.

  4. US oil production is up 17% y/y to 10.9m bpd. Along with crude oil prices being up 50% y/y, I think that is where a decent chunk of 4.6% gdp growth number is coming from.

    1. Hi Jacob–yes–good point. I would have to do more homework on the affect of oil on GDP–sure there is data our there.

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