A RELATIVELY QUIET DAY; PPI AT 8:30

Equites wavered following FRB Vice Chair Brainard statement that it would be “appropriate” for the central bank to slow its pace in interest-rate hikes.  Brainard further stated while the central bank has “additional work to do, it makes sense to moderate the size of its rate hikes soon.”

Officials in September forecasted rates would reach 4.6% in 2023 but FRB Chief Powell on November 2 suggested projections for the so-called terminal rate would probably move higher when they are updated at the December meeting.  It is now believed rates may peak around 5.0% by the middle of next year.

Last week the S & P 500 had its best week since June but yesterday many began to think the post CPI advance was overblown as the Fed has not indicated it would stop increasing rates but rather just slow the pace of increases.

And then there was the incredible advance in the 10-year Treasury as yields fell a stunning 33 bps to 3.84% yield, a percentage drop in yield that many have not experienced in over 40 years.

At the September FOMC meeting FRB Chair Powell stated, “you want to be at the place where real rates are positive across the entire yield curve.”

Positive rates are defined as interest rates higher than the inflation rate, which most believe is the core PCE Price Index which is currently at 5.1%.  The Federal Reserve’s mandated speed limit is 2.0%.

It is evident the Fed does not expect inflation to moderate under 5.0% in the intermediate future given that the FRB Chair stated two weeks ago the “terminal rate” would probably increase to around 5.0%.

Ifthe yield curve was positive throughout the entire curve, perhaps the largest carnage in the bond market may be in longer dated debt, defined as 20 years longer.  According to Bloomberg analytics, a 100-bps increase in the 30-year Treasury from today’s yield of 4.07% the long bond would decline an additional 18.35% on a total return basis in the next 12 months.

What will happen today?  How will the markets respond to the PPI?

Last night the foreign markets were mixed.  London was down 0.02%, Paris up 0.31% and Frankfurt down 0.19%.  China was up 1.64%, Japan up 0.10%  and Hang Sang up 4.11%.

Futures are up about 0.50% on the apparent easing of Sino-American tensions and growing confidence that the Federal Reserve will be able to slow its rate hiking pace. The 10-year is up 11/32 to yield 3.82%.

 

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