Trying to predict movements in interest rates on a day to day basis is certainly a fools errand and markets prove it everyday.
Yesterday we got a gross domestic product (GDP) report that was strong – stronger than anticipated. On the surface one would have expected interest rates to move much higher–I certainly expected it. The 10 year treasury which was trading around 4.92% at 8 a.m. (central) moved lower all day long to trade as low as 4.84% which is where it closed. In a world where we have some many different cross currents–i.e. wars etc. one can’t predict where rates are going over the very short term. Fortunately we don’t really need know where rates are going day to day because we don’t make decisions on a daily move in rates–fortunately.
Of course the strong economic numbers lately don’t bode well for FOMC rate hikes. It seems now the Fed has hemmed themselves in for the meeting next week (Oct 31-Nov 1) with heavy tilt toward ‘no hike’. But we are very closed to the point where a 1/4% hike is getting baked into the December (12th-13th) decision–there is simply no way the Fed is going to skip again with the strong economic news. We will see the personal consumption expenditures (PCE) in 30 minutes and this will give us more inflation data.
Watching CDs and now 5.7% is the top rate at the brokers I use – nothing to get overly excited about. Regardless of short term moves in rates the treasury is going to be looking to sell $1.5 to $2 trillion in debt next year and this will keep pressure on rates – it is going to be another very interesting year.
Well let’s see if the PCE news is going to create crazy markets or ho hum markets.
I think if you look at the whole picture from the EIA you can see that demand is down in the US for gasoline anyway. Also, looking at the numbers from XOM’s recent quarter sort of confirms that. Gasoline inventories in the U.S. rose while gasoline production fell. Inventories had been very low but now have touched the 2019 level for the same date, and October 2019 was the beginning of a downturn. Gasoline prices are something like 1.4% higher year over year, gasoline futures are much lower, and the crack spread is much, much lower. So, all of this is dis inflationary. As we start to peel off the year over year lag in shelter inflation, I think many are going to be surprised by what happens to headline CPI going forward. I believe the Fed is done with rate hikes for this cycle.
bought some EFSCP at $13.90
Good news brings fears of more rate hikes. So good news is bad news. And bad news is good news raising hopes of cuts. As if that outweighs a bad economy. Careful what we wish for we might get it.
Already looking forward to this year ending Tim? I was somewhat surprised yesterday as to how oil reacted, being down on the strong economic news but then most of this is old news from last month.
I was surprised about oil yesterday also but today there are two small pieces of news to consider. First demand may pick up in China with the government announcement of increased support for economic growth. Second, the Israel-Hamas conflict is forcing the White House to consider new sanctions on Iran which I read to say that the White House will no longer tolerate Iran’s export of 3M BBL’s a day.
Tim it is ironic that on the day that Yellen avows that higher rates are only the result of stronger growth, unexpectedly higher economic growth coincides with a drop in yields? Wasn’t she a big supporter of the theory of transitory inflation?