So here we are. Another FOMC meeting and another 75bp hike. But 100bp ends, so 75bp could be positive (albeit briefly) for risk assets. A dot chart is followed because the closing rate is key where the market performance peaks. A 75 basis point increase will push the effective funds rate to 3.08%, but will leave the Fed with more work to do than the 2-year rate at%.
Expect 75 bp increase even though transom position is 100 bp.
Ahead of the Federal Open Market Committee (FOMC) meeting, market flows are positioned 100bp higher, but the meeting is dominated by a 75bp discount. An increase of 100bp would be an overreaction in our view, while 75bp would be enough to reinforce a market discount that already implies a final final rate north of 0.25%. Chairman Powell’s Humphrey-Hawkins testimony, followed by a rebound in CPI inflation, was enough to raise the market discount by about 100 basis points per month. At this point, all the Fed needs to do is raise 75bp and maintain a hawkish bias.
The Fed doesn’t need to do much other than a 75 bp hike.
A dot chart is important but not critical because the dots move over time. We believe the midpoint will be above% in 2022 (read the end of the year) and the Fed may decide to keep it above% in 2023. The Fed’s dot chart shows the longer term interest rate at 2.5% . , which is considered their neutral rate and is roughly where the funds rate is now. Thus, a 75 basis point increase, if implemented, would lead to the first rate hike in this cycle. The demands of the band of 100bp were based partly on the idea of fixing the exchange rate of the bottom 1% below neutral. But 75bp also tightens policy reasonably aggressively and avoids unnecessary market confusion about future intentions.
Closed-end fund interest continues to play a key role in the bond market.
After this meeting, where fund rates are a critical factor in rising bond yields. After an increase in the base rate, the new market rate benchmark is north of 3 percent (with an effective base rate of 3.08 percent). A similar increase in November would then cap%, the range the government’s 2-year yield currently targets. History shows that the 2a predicts the fund’s interest rate changes well in advance, but as the end of the rate hike cycle approaches, the 2a’s return response decreases. Based on the price development of the last few weeks, we are not quite there yet. But with funds peaking at 0.25- 0.5%, we’d be surprised to see a two-year return above 0.25%.
According to the curve, the 10-year yield has a greater chance of trading with the fund’s interest rate earlier than the 2-year yield. This is typical when the curve has gone into inversion mode. In this sense, longer maturities lead to higher short-term interest rates at this point in the cycle. This is the opposite before discounting the exchange rate, when the curve increased at the long end. Now the long end is waiting for the bottom price to rise and hit. From there, probably around the time of the November 2nd meeting, the 10-year could level off at the funds rate (around 3.75% or slightly higher), with the funds rate expected to peak around 0.25% (actually 0.33%).
Currently, the Fed does not want to focus on discounting interest rate
If the top of the funds rate is reached with reasonable certainty, the 10-year term can remove the uncertainty of the prime rate and start trading. well through the bottom rate (waiting for cuts). Right now, the Fed doesn’t want to focus on raising rates, but to be fair, the market usually doesn’t aggressively discount a peak until it actually sees it. This is where the value of the hawkish tone comes into play, as it helps maintain a connection with the upward pressure on market rates in general. With the 10/30 currently on the verge of a reversal, expect the peaks and troughs in market interest rates to occur at the earliest in 30 years.
Today’s events and market overview
Italy swaps short-term bonds for 10- and 15-year bonds worth up to €2 billion. Germany auctioned
billion euros of 10-year bonds. Austria gave the green light to a new
-year bond yesterday, which should be the talk of the day.
Luis de Guindos is the only ECB official on the schedule.
Both UK CBI prices and orders are expected to fall in September.
Tonight’s FOMC meeting is a blur in an otherwise quiet session. The tone of the conference call and quarterly economic and interest rate forecasts will be closely watched to shape future bullish expectations. The Fed’s thought leadership and the continued rally in the dollar means that the comparison with other interest rate markets is even higher than usual.
Prior to the FOMC, US releases included mortgage applications and existing home sales. Today’s events and market outlook
Italy swaps short-term bonds for 10- and 15-year bonds worth up to €2 billion. Germany auctioned
billion euros of 10-year bonds. Yesterday Austria authorized a new
year bond which should be the talk of the day. Luis de Guindos is the only ECB official on the schedule.
Both UK CBI prices and orders are expected to fall in September. Tonight’s FOMC meeting is a blur in an otherwise quiet session. The tone of the conference call and quarterly economic and interest rate forecasts will be closely watched to shape future bullish expectations.