Market commentary: Is the Fed set for liftoff?

Yesterday US Federal Reserve chair Janet Yellen held a testimony in front of the House Financial Services Committee in Washington where she, together with New York Fed President William Dudley said that the central bank could boost interest rates as soon as next month. They also voiced confidence inflation isn’t too far below the central bank’s goal.

The general tone during the testimony was one that the US economy was performing well and to the expectations of the Fed, setting the scene for a potential initial interest rate hike sooner, rather than later. Yellen said that if economic data continues to point to growth and firmer prices, a December rate hike would be a “live possibility.”

Speaking in New York hours later, Dudley said he agreed with the chair, but went on to say “let’s see what the data shows.” Fischer didn’t comment on the timing of the liftoff but said that price pressures will move toward the Fed’s target.

The Federal Open Market Committee said in its October statement that it will consider raising rates at its “next meeting,” citing “solid” rates of household spending and business investment. The comments from Yellen, Dudley and Fischer, who are considered the three most influential members of the committee, suggested that the Fed is actively considering a December hike should data turn out to be positive.

Investors have raised to almost 60 percent the probability of a rate increase by policy makers’ December meeting, according to pricing in the federal funds futures market. That compares to 33 percent a month ago, assuming the effective funds rate average is 0.375 percent after liftoff. U.S. central bankers have held the policy rate near zero since 2008 as they have waited for labor markets to move closer to their goal of full employment.

The unemployment rate stood at 5.1 percent in September, slightly above the 4.9 percent rate that officials estimate would satisfy their mandate. The Bureau of Labor Statistics will release the October jobs data Friday. Fed officials’ last meeting of the year will be held Dec. 15-16, and it includes a press conference with Yellen and a new set of forecasts from policy makers.

As a reaction to the statements US equity markets sold off with the Dow Jones closed the session 0.28% lower together with the S&P500 and NASDAQ composite indices which closed 0.35% and 0.05% down respectively. In the bond markets, we witnessed a steepening of the yield curve with US short term yields falling marginally while longer term yields increasing. 10-Year benchmark US Treasury bonds are now yielding 2.234%, a 1 basis point change from the previous day as from this writing.

Chinese equities were off to a bright start with the Shanghai Comp (+2.81%) technically entering a bull market having now risen over 20% from the August 26th lows. The CSI 300 is up over 3% despite there appearing to be little in the way of new news out. Markets in Japan have seen reasonable gains also with the Nikkei and Topix +1.01% and +0.95% respectively.

In Europe, the British FTSE 100 has opened 0.45% down, and the Spanish IBEX and Italian FTSE MIB are also 0.30% down respectively, while the German DAX is unchanged after underperforming yesterday due to the Volkswagen emission scandal which took its toll on German corporates.

This article was issued by Simon Psaila, Treasury Officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.