Hi. Thought I’d share the relevant stuff I gathered in my usual weekend review and look-forward. Looking for crits, amplifications, other views.
1. Fed funds and Eurodollar futures are consistent with a rate hike to 2.25 – 2.5% in December, then a hike to 2.5 – 2.75% in June-2019, and finally to 2.75 – 3% in mid-2020 and that’s it — 3% terminal policy rate for this cycle. That is also generally consistent with a 5yr note rate implied forecast 5yrs forward (Q4-2023) of 3.25%. And the TIPS/Treasurys breakeven inflation forecasts have dropped to 5yrs – 1.95%; 10yrs – 1.99%.
2. The following FI CEFs that I watch ALL are on well-developed weekly MACD sell signals: PCI, PDI, PTY, PKO, PHK, PFN, PFL, PCN, PCM, DSL, DBL, BGB, KIO, FPF, HPS, and more. Looking at a 1yr weekly chart, one can feel like many CEFs are near forming a possible double bottom and horizontal support from work done around and a bit above the Feb-18 bottom. However, expanding to a 5yr chart, one sees we have not yet retraced even 1/3 of rally since early 2016 — when we feared Fed would do precisely what they are doing now.
3. Obviously, futures markets predict a more benign course of rate hikes than implied by recent Fed open mouth policy. IMO the current narrative based on Fed’s quack has to be modified pretty soon or we will probably see another leg lower — at least to a halfway retracement of the early-16 to about-a-month-ago rally. Below are individual factoids data point that may bear on the future narrative….
– Friday the Q3 GDP release was a robust 3.5%, down only a little from Q2’s 4.2%. However, most of the strength can be attributed to a drop in measured inflation during the quarter. The deflator dropped from 3% to 1.7%. If the deflator had remained at Q2’s 3%, GDP would have been reported Friday at only 2.2%. 3.5% supports the Fed narrative, but the reduced deflator suggests Fed should have no fears about inflation and less reason to tighten.
– Monday we see personal income and expenditures. Very benign +0.1% rises are anticipated for both headline and core PCE deflators, bringing the year-over-year readings down to headline 2.0% and core 1.9%. Better inflation story perhaps takes pressure to hike off Fed.
– Later in the week, ISM manufacturing reading is expected to be around 59, same as last month and very stong — supports Fed narrative.
– Next Friday, the monthly employment data is forecast to show a robust increase of 190k jobs and an increase in average hourly earnings that will take the year-over-year increase to 3.1%. More support for the current Fed tightening narrative.
My bottom line take: the benign inflation data will not be enough to modify the current Fed narrative. They still wish to take the Fed funds rate to at least 2.75-3% since the economy continues to grow at well over its longer term potential non-inflationary rate of about 2%. Further, loud criticism from the president and other politicians essentially necessitates a hike in December almost regardless of how events or data unfold. The consequences of Fed “caving in” to political pressures for the dollar, US inflation, and Treasury borrowing costs would be potentially disastrous — something FOMC members understand that appears lost on their vocal political critics.