Market Update 6/11/2018
A very busy week with upcoming FOMC and ECB meetings as well as important economic data releases.
First up, The Consumer Price Index (CPI) for May, released this morning, rose 0.2% month over month and the Core, which strips out volatile food and energy components, also rose 0.2% month over month. Year over year consumer prices now up 2.8%. (See Chart Below)
CPI is not the preferred measure of inflation for the Federal Reserve, instead, they put more weight on the PCE (Personal Consumption/Expenditures), but nonetheless this number points to rising inflation and will catch the Fed’s attention.
Today begins the 2-day FOMC policy meeting with a decision on interest rates tomorrow @ 2 pm EST. It is a foregone conclusion that the Fed will be raising rates tomorrow by .25bps bringing the Fed Funds target range between 1.75-2.00%. The FOMC will also release their updated “Dot Plot” chart tomorrow which tracks each FOMC member’s Fed Fund target rate projections. Markets are eagerly awaiting to see if the Fed will pull back on its rate hike path is given that global headwinds in Italy, Spain, and UK are causing uncertainty to long-term economic and political stability in the region.
The ECB will discuss this uncertainty at their policy meeting this Thursday. Like the Fed the European Central Bank (ECB) meets to discuss future policy but they only have 1 single mandate which is to achieve price stability. The Fed has a duel mandate, price stability, and employment. Markets are waiting to hear when the ECB will discontinue its quantitative easing program. Currently, the program is scheduled to expire in September but prices have not increased to their target, unlike in the U.S., and the uncertainty surrounding trade and tariffs coupled with drama in Spain and Italy, may cause the ECB to prolong QE .
Mortgage Rates are set to open flat from yesterday with the 10yr Note currently yielding 2.97%. The current trading range has been 2.85% to 2.98%. I wouldn’t expect yields to move ahead of tomorrow’s FOMC decision.
At 1 pm today the Treasury will auction 14 Billion new 30 Year Bonds. Yesterday the Treasury sold 22 Billion in new 10yr Notes which was well received by markets. Yields hovering around 3% have brought in buyers/demand. Earlier this year markets were worried about the increased debt supply coming out of the U.S. to fund the widening budget deficit, but so far the market has had no issues buying the debt at these higher rates.
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