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.