Equites had a good day on Friday as over 450 companies in the S & P 500 advanced, the catalyst of which was a Federal Reserve comment that an interest rate cut remains a possibility. Sentiment however is fragile, with Bitcoin set for its worst month since a string of corporate collapses rocked the sector in 2022. The cyber currency is down about 37% from it early October apex, the catalyst of such is not clearly defined.
The short end of the Treasury market benefited from the Fed Bank of NY President’s remark about monetary policy as futures are now suggesting about a 70% chance of another reduction at the December meeting, up from about 30% last Thursday.
Longer dated Treasuries sold off as such a possible cut is inflationary. Depending upon the benchmark, inflation is still 50% to 75% higher than the mandated speed limit. Lowering rates increases the odds of higher inflation and inflationary expectations.
Inflationary expectations are already about double the 2% mandated level.
The yield curve is now the steepest since early 2022, around the period that the Federal Reserve radically changed monetary policy, however insisted that the change would not be of significance. In reality the Central Bank increased short-term rates by the greatest amount on a percentage basis in history.
The markets have been operating in a vacuum because of the government shutdown that all but delayed the release of most economic statistics. Friday the BLS stated it was cancelling its October CPI report, stating it was unable to retroactively collect some data.
The cancellation was anticipated however this lack of data is a headache for the markets especially at a time when inflation—despite having receded from the generational high reach in 2022 amid pandemic related supply change disruptions–continues to exceed the Fed’ 2% target and remains in a very tight range.
Is this another possible reason for the steepening of the yield curve?
What will happen in this holiday shortened week?
The economic calendar is crowded with many releases, some of which are considerably dated. How will the data be interpreted?
Last night the foreign markets were mixed. London was up 0.23%, Paris down 0.02% and Frankfurt up 0.51%. China was up 0.05%, Japan down 2.40% and Hang Seng up 1.97%.
Futures are nominally higher. Bitcoin is resuming its slide. The markets are now pricing 60% chance of an interest rate reduction in December amounts a rift in Central Bank officials’ sentiment and the data black out. The 10-year is up 2/32 to yield 4.05%.
