Fixed Income Market Commentary by Kevin Giddis

December 13, 2017

The Treasury market is trading lower this morning as traders prepare for one of the most advertised rate hikes in recent memory. Ok, maybe that’s spreading it on too thick, but you get the point. Economists and strategists around the globe have had today’s date circled on their calendars. It is as close to a sure thing as you can get, and why not? The U.S. economy is growing at a steady pace along with job creation with fewer claims than in years! There is just one thing that keeps dogging the Fed, handicapping their desire to keep raising rates, and that is clearly centered on the rate of inflation. Yesterday’s PPI number (up 0.3% as a core number) gave the inflation hawks some good news. If only that good data about inflation at the wholesale level could somehow make its way to the consumer, then they would really have something to talk about! But, unfortunately, that didn’t happen this morning as the Consumer Price Index failed again to give the inflation hawks what they wanted. The CPI as a headline number rose by 0.4%, as expected. The “rub” came in the form of the core CPI which only rose by 0.1%, taking the year-over-year number to 1.7%, DOWN 0.1% from last month. While it isn’t likely to keep the Fed from tightening today, it does tend to change the dynamics of any forward tightening that could occur in 2018. Certainly the FOMC is frustrated by this, and it will be interesting to see the new dot-plot, which will give you a peek into the future, by way of the committee’s forecast of future hikes. The Fed Funds Probability Index is predicting almost no chance in January, but north of 60% chance the Fed will go in late March of 2018. So now we wait. We wait for the Fed to confirm our thoughts, and we wait for the Fed Chair Yellen’s likely last press conference as the head of the Fed. She steps down in February, and there isn’t a press conference after the January meeting. Look for the Fed Funds rate to change to 1.50% from 1.25%, but unless we begin to see a heavier dose of inflation in the coming months, the odds for a March move will probably decline below the 50/50 mark. Today is all about the FOMC meeting, It’s about meeting expectations and trying to figure the next move, even though the long end of the yield curve continues to attract more buyers who don’t believe that Europe nor the rate of inflation are about to take off. So far, they are winning, but the cost of a flattening curve is rising each day that the Fed and the 10-year and out buyer remain at opposite ends of the future of prices for goods and services.

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