Investors Await Fed Rate Decision on Wednesday

  • As oil moves to a new yearly high, and as investors await the FOMC rate decision on Wednesday, Treasuries continue to be under pressure. Yields are flirting with their October highs as trading opens for the week. Presently, the 10yr Treasury is yielding 4.35%, just under the 4.36% cycle high, while the 2yr is yielding 5.06%, just under the 5.08% cycle high.


  • With an economic calendar on the light side this week, it just increases the focus on the upcoming FOMC rate decision. We continue to agree with the market consensus of a pause but with a continued hawkish tone and keeping a rate hike for November firmly on the table. Being a quarter-end meeting we’ll get updated economic and rate forecasts. As for the updated dot plots, we think they will continue to show one more hike in 2023, ending the year at 5.50% – 5.75%, but the 2024 100bps in rate cuts that were part of the June forecast will likely be reduced to75bps as economic growth and the labor market continues to surprise to the upside, and as we saw in last week’s reports inflation remains somewhat sticky.  The market, meanwhile, is grudgingly backing off its earlier 100bps in rate cuts for 2024 and currently stands at just under 100bps in cuts, so the higher-for-longer message is slowly sinking in for investors. (See fed funds futures table below).


  • Away from the Fed, the UAW strike continues into its fourth day and with no agreement imminent the implications are two-fold. The longer the strike goes on the more production will be dented and that will be a headwind for fourth quarter GDP. From a monetary policy perspective, it shows the restlessness of labor to negotiate for better wages. Combined with previous labor actions at UPS, American Airlines, United Airlines, etc., it speaks to the increased bargaining power of labor and the potential inflationary implications and that seems to align with the higher-for-longer policy stance, so expect to hear more of that at Wednesday’s post-meeting press conference.


  • I guess we need to mention too that September 30th is approaching which is the end of the federal government’s fiscal year and a budget agreement is nowhere to be found. If we roll into October without a budget deal, or at least continuing resolutions to keep the lights on, some government operations will stop. While not nearly market moving as the debt ceiling debate from earlier this year, a partial government shutdown would be just another headwind for the economy to weather as the fourth quarter opens.


  • While economic releases are light this week, the reports we do get are mostly housing-related with August housing starts and permits due tomorrow and existing home sales on Thursday. Starts and permits are expected to dip slightly from July’s results while existing sales are expected to be up slightly from July but still near the lows for 2023. I guess we should mention that the latest Leading Economic Index will be released on Thursday, and it’s expected to be negative for the nineteenth straight month. It’s been one of those recession indicators that’s been fruitlessly flashing yellow for some time and that is expected to continue.

US Fed Funds Futures

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.88 5.61 5.55 5.56 5.67 6.14
0.50 5.86 5.58 5.49 5.45 5.53 6.02
1.00 5.86 5.55 5.46 5.40 5.44 5.90
2.00 5.54 5.40 5.32 5.33 NA
3.00 5.28 5.26 NA
4.00 5.22 NA
5.00 5.18 NA
10.00 NA

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Published: 09/18/23 Author: Thomas R. Fitzgerald