Where Do We Go From Here?

As expected, the Federal Reserve left interest rates unchanged at last week’s post-Election Day monetary policy meeting, while signaling another 25-basis point increase in the federal funds rate at its December 18-19 get-together.

But the results of last week’s elections, which returned control of the House to the Democrats, may put future rate increases next year in doubt. That bodes well for long-term Treasury bond prices – i.e., yields may have peaked.

As we know, Maxine Waters, D-California, is now the likely next chairman of the House Financial Services Committee. To put it mildly, she doesn’t like banks. Her first order of business, no doubt, is to impeach President Trump, as she’s said countless times. But a more realistic second goal will be to roll back all or most of the recent bank regulatory measures made so far by the Trump Administration, which, of course, rolled back much of the regulatory measures passed under the previous administration, mainly through the Dodd-Frank financial reform law.

If she’s successful, that will reduce the mammoth profits the banks have been making the past several years, which were boosted further by the Republicans’ tax reform law. That sharply reduced corporate income tax rates, not just for banks but all companies, although the banks seem to be the biggest beneficiaries. No doubt Waters and her Democrat colleagues have that in their gunsights also.

But that won’t be the end of it. Continue reading "Where Do We Go From Here?"

Onward And Upward

Apparently, the bond market just got the email that the U.S. economy is smoking and that interest rates are going up.

The yield on the benchmark 10-year Treasury note jumped 17 basis points last week to close at 3.23%, its highest level since March 2011. The yield on the 30-year bond, the longest maturity in the government portfolio, closed at 3.41%, up an even 20 bps.

The pertinent questions are, what took so long to get there, and where are yields headed next?

Analysts and traders pointed to the Institute for Supply Management’s nonmanufacturing index, which rose another three points in September to a new record high of 61.6. The group’s manufacturing barometer, which covers a smaller slice of the economy, fell 1.5 points to 59.8, but that was coming off August’s 14-year high.

Bond yields jumped further after the ADP national employment report showed private payrolls growing by 67,000 in September to 230,000, about 50,000 more than forecast. It turns out the ADP report didn’t precursor the Labor Department’s September employment report, but it was still pretty strong. Nonfarm payrolls grew weaker than expected 134,000, less than half of August’s total of 270,000, but that number was upwardly revised sharply from the original count of 201,000, while the July total was also raised to 165,000. The relatively low September figure was blamed not on a weakening economy but on the fact that employers are having trouble finding workers. Meanwhile, the unemployment rate fell to 3.7% from 3.9%, the lowest rate since December 1969.

Indeed, last week’s jobs report only confirmed Continue reading "Onward And Upward"

10-Year U.S. Treasury Note Yield Eyes 3.33%

Last week I promised to update the outlook for the U.S. interest rate, which has a strong impact on every asset class including precious metals.

More than a year ago I shared with you my concerns about the future of gold once the “era of rising rates” would come. The 10-year U.S. Treasury note yield (10Y) was at 2.2%, and large investment banks forecasted 3% yield for the near future at that time.

Indeed, that future has come in one year the 10Y is above the 3% now, and it doesn’t look like it’s the final stop. To see what could be the next I’ll share with you two charts starting from a short-term view.

Chart 1. 10Y Weekly: 3.33% And More

10-Year U.S. Treasury Note Yield
Chart courtesy of tradingview.com

This chart above observes the past five years to envelop the earlier top of 3.04%, which is under a second attack as the first one this past May couldn’t peg it. The yield closed last week at the 3.07%, and this time it could finally overcome the barrier to reach the target.
Continue reading "10-Year U.S. Treasury Note Yield Eyes 3.33%"

What's The Right 'Neutral' Interest Rate?

Will last Friday’s August jobs report showing that wages rose nearly 3% compared to a year ago finally convince the Federal Reserve that inflation really is starting to pick up steam? If not, what exactly will it take?

That report was certainly good news for workers, who have waited a long time – since 2009, apparently – to see their wages rise by so much. But it also provides convincing evidence that 2% inflation – which the Fed has been trying to stoke for the past 10 years – has finally arrived. But will the Fed actually believe it and do something before it “overheats,” to use its word?

A hike in the federal funds rate to 2.25% at the Fed’s September 25-26 monetary policy seems like it’s already baked in the cake. But it’s still not a given that another one will happen at the December meeting. According to CME’s Market Watch tool, the odds of a rate hike at the yearend confab are only 72%, compared to more than 98% for this month’s meeting. (While the Fed does meet in early November – just a day after the “most important election in our nation’s history,” if you believe some of the political pundits – a rate change then is very unlikely. The Fed has indicated that it will only adjust rates at a meeting that ends with a press conference by the Fed chair. That pretty much disqualifies November).

After the jobs report was released, the yield on the two-year Treasury note hit 2.70%, its highest level in more than 10 years. The benchmark 10-year note closed last week at 2.94%, its highest point in over a month. That those rates didn’t go even higher seems to indicate that the market isn’t yet sold on two more rate increases this year.

At least one member of the Fed is. Continue reading "What's The Right 'Neutral' Interest Rate?"

Don't Buy The Low Inflation Story

Federal Reserve Chair Jerome Powell sent investors home happy for the weekend last Friday when he outlined a fairly balanced plan of interest rate increases designed to fight inflation while avoiding throwing the economy off track. Nevertheless, some economists at the Fed itself appear to believe that the central bank may not be taking the threat of inflation seriously enough.

In his prepared remarks for his speech at the Kansas City Fed’s annual policy symposium in Jackson Hole, Wyoming, Friday, Powell indicated that he’s not overly worried about rising inflation, or at least not enough to be more aggressive about raising rates to avoid piercing a hole in the economic balloon just as it’s starting to expand.

“While inflation has recently moved up near 2%, we have seen no clear sign of an acceleration above 2%, and there does not seem to be an elevated risk of overheating,” the Fed chair said. Moreover, he said the Fed has to balance “moving too fast and needlessly shortening the expansion, versus moving too slowly and risking a destabilizing overheating. I see the current path of gradually raising interest rates as the approach to taking seriously both of these risks.”

That was enough to push the S&P 500 to its first record close since January 26 and the yield on the benchmark 10-year Treasury note to 2.81%, which is down about 20 basis points from its recent peak of 3.00% at the beginning of this month. Continue reading "Don't Buy The Low Inflation Story"