US bond traders brace for inflation data
Bloomberg|
Updated: Nov 13, 2017, 08.23 AM IST
In the eyes of Morgan Stanley, bond traders would be wise to remember the 15th of November.
That’s when the US Labor Department releases October inflation data, the final reading of the consumer price index before the Federal Open Market Committee begins its twoday meeting next month. Officials are widely expected to raise interest rates again, with the market pricing in a more than 80 percent probability of a December hike. Two-year Treasury yields are the highest since 2008 in anticipation of the move.
After Federal Reserve officials for years tip-toed around the Treasuries market for fear of rattling traders with tightening monetary policy, they’ve stuck to their predicted course throughout 2017. So much so, in fact, that a December hike has been a foregone conclusion for weeks, helping compress yield curves in the $14.3 trillion market to the flattest in a decade.
To Matthew Hornbach, global head of interest-rate strategy at Morgan Stanley, the inflation gauge has “game-changing potential,” and is one of the last chances to blow up those well-established trades. “If US CPI misses, I think the probability of a December hike could head toward 50 per cent,” Hornbach said. Whether it gets there depends on how weak it is compared to forecasts, and whether Fed officials express concern about it during their speeches, he said. It could resteepen US yield curves.
The caveat about Fed speakers is important. Even with Chair Janet Yellen admitting stubbornly low inflation is a “mystery,” officials have said price growth below their 2 per cent target is “transitory” given the strength of the labour market. And after all that time spent in the past ratcheting up rate-hike rhetoric to convince traders, policy makers may want to avoid fueling doubts about a December hike now.
That’s when the US Labor Department releases October inflation data, the final reading of the consumer price index before the Federal Open Market Committee begins its twoday meeting next month. Officials are widely expected to raise interest rates again, with the market pricing in a more than 80 percent probability of a December hike. Two-year Treasury yields are the highest since 2008 in anticipation of the move.
After Federal Reserve officials for years tip-toed around the Treasuries market for fear of rattling traders with tightening monetary policy, they’ve stuck to their predicted course throughout 2017. So much so, in fact, that a December hike has been a foregone conclusion for weeks, helping compress yield curves in the $14.3 trillion market to the flattest in a decade.
To Matthew Hornbach, global head of interest-rate strategy at Morgan Stanley, the inflation gauge has “game-changing potential,” and is one of the last chances to blow up those well-established trades. “If US CPI misses, I think the probability of a December hike could head toward 50 per cent,” Hornbach said. Whether it gets there depends on how weak it is compared to forecasts, and whether Fed officials express concern about it during their speeches, he said. It could resteepen US yield curves.
The caveat about Fed speakers is important. Even with Chair Janet Yellen admitting stubbornly low inflation is a “mystery,” officials have said price growth below their 2 per cent target is “transitory” given the strength of the labour market. And after all that time spent in the past ratcheting up rate-hike rhetoric to convince traders, policy makers may want to avoid fueling doubts about a December hike now.
