The Treasury market is trading higher this morning as the general feeling in the markets is that the Fed didn’t go far enough. After digesting all of the news from the Fed, the steepness of curve faded and short rates actually moved higher. That’s on the Fed and it continued in the overnight session as well. The good thing about yesterday’s Rate Decision is that the FOMC addressed the liquidity problem head on and has it on their radar going forward. I am not sure they didn’t do exactly what they should have given the data in front of them, but the reaction took the narrowing negative spread between the 3-month bill and the 10-year note from -12 back out to -15 and narrowed the positive spread between the 2-year and 10-year from 7 to plus 4. The expectation would have been to see the 2-year note yield fall 6-8 basis points while the 10-year maintained a yield close to where it was before the FOMC acted. That’s how built in this decision was in the bond market’s eyes. In other words, “thanks for doing exactly what I expected you to do.” The Fed Chair mentioned being data-dependent. Today, Jobless Claims for the week ending September 14th came in slightly higher (up 2,000) than expected, but 208,000 is still a good number. The Philadelphia Fed Survey for September came in at 12.0 vs. 16.8 in the previous month. Later we will get Existing Home Sales for August (exp. down 0.7%), which could give the market a peak into the future of resales. Overall, the bond market got what it expected, but not what it wanted…it never does. Pay close attention to how and how long the Fed continues to intervene in the liquidity and funding operation of the overnight market. The current explanation is that because of big financing settlements and quarterly tax payments, liquidity is at a premium. That may indeed be the case, but each day this continues, the more the markets begin to question the reasons. Not sounding the alarm bell yet, just make it part of your observation each day. Looking ahead, the Fed Funds futures Probability Index is suggesting that the FOMC might or might not lower rates at one of the two remaining meetings of 2019. Call it 40-60, with the “no’s” in the lead. A lot can change between now and then, but it appeared that the Fed Chair made it clear that it would be because of a decline in business conditions vs. the will of the market or the White House. In other words, we would need to see the production indices fall below 50, for inflation to fall and for unemployment to rise. Jay Powell pretty much said yesterday, that he paid the 2019 premium on the insurance policy.
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