FOMC Rate Decision & D.C. Developments Will Dictate Trading This Week

Dec 17, 2018
FOMC Rate Decision & D.C. Developments Will Dictate Trading This Week

FOMC Rate Decision & D.C. Developments

The FOMC rate decision on Wednesday will be the focus for investors this week, but while a rate hike to 2.50% is assured it’s the rate forecast for 2019 and beyond that will get the most attention.  Will the Fed cut its rate hiking ambitions from three to two times in 2019? Will it cut its terminal rate forecast from 3.00% to 2.75%? The answers to these questions will drive market trading come Wednesday afternoon. Presently, the market is expecting only 10bps of tightening next year and if one thing is for sure the Fed won’t be projecting less than one hike next year so some pressure on the short-end seems likely after the meeting. Away from the Fed meeting, the ongoing tit-for-tat trade “negotiations” with China will provide tradeable headlines but perhaps even more the gathering clouds over the White House are adding to market uncertainty and risk-off equity selling.   Away from the action in DC, we’ll get November housing starts and existing home sales to further gauge the extent of softness in that interest rate sensitive sector.


Treasuries

Treasuries

Short-Term Rates

Short-term Rates

Economic Calendar

Economic Calendar

 


Top Events of the Week Top 5 Events for the Week

DEC 17 — 21,  2018

1. FOMC Rate Decision — Wednesday
2. Trade Issues & DC Developments — All Week
3. November Personal Income & Spending — Friday
4. November Existing Home Sales — Wednesday
5. November Housing Starts & Permits — Tuesday
 

 

1.  FOMC Rate Decision — Wednesday

The FOMC rate decision on Wednesday will be the focus for investors this week but while a rate hike to 2.50% is assured it’s the rate forecast in 2019 and beyond that will get the most attention.  Will the Fed cut its rate hiking ambitions from three to two times in 2019? Will it cut its terminal rate from 3.00% to 2.75%? Will it express increasing concern with the gathering global headwinds? The answers to these questions will drive market trading come Wednesday afternoon. Presently, the fed funds futures market is expecting only 10bps of tightening next year. If one thing is sure, the Fed won’t be projecting less than one hike next year so some pressure on the short-end seems likely after the meeting with the 2yr-10yr curve possibly flattening to new cycle lows (i.e., <10bps).   It’s also expected that with the rate hike the Fed will only raise the IOER by 20bps for the second time in this hiking cycle. This is an attempt to keep the effective fed funds rate near the middle of the range  when it has been trending towards the top.

 

2.  China Trade Issues & White House Woes — All Week

While the Fed rate decision will garner plenty of attention, headlines regarding any movements in the China trade matter, and even more the various investigations of the Trump White House, will get plenty of focus as well. The escalating revelations, indictments and convictions from the U.S. Attorney’s Office for the Southern District of New York and the Mueller investigation are adding to market uncertainty and that is certainly contributing to the latest bout of risk-off equity selling. Until the investigations reach their conclusions the drip-drip-drip of revelations are only going to continue weighing on the risk-off posture  and that will add to flight-to-safety bids in Treasuries.

 

3.  November Personal Income & Spending — Friday

Friday’s release of the personal income and spending numbers for November will give us a look at the health of the critical consumer as we head into the final month of the holiday-selling season. Personal income is expected to have increased 0.3% missing the 0.5% rate in October. Personal spending is expected to also rise by 0.3% but missing the strong 0.6% October gain. Real spending—adjusted for inflation— is expected to increase 0.3%, just off October’s 0.4% gain.   The Core PCE (YoY) inflation measure is expected to tick up to 1.9% versus 1.8% in October breaking a three month streak of decreasing YoY gains but still under the Fed’s 2.0% benchmark.   In all, expectations are for another solid income and spending report that confirms the strong retail sales numbers of last week. Thus, investors will again be confronted by recessionary concerns in equity markets while failing to see signs of any real weakness in the economy.

 

4.  November Existing Home Sales — Wednesday

The housing market has had decidedly softened in recent months as higher rates, higher prices and moderate wage gains decrease affordability. The interest rate sensitive sectors of housing and autos have been dinged the most in the Fed’s rate-hiking campaign and thus the November activity will be examined for any further weakness.  Existing home sales account for nearly 90% of the market and gives us the broadest view of market health but with data based on closings it can be a bit dated. November existing home sales are projected to total 5.20 million annualized units which is slightly down from the 5.22 million in October. The average over the past year has been 5.42 million annualized so in keeping with recent housing releases a below-average print with a modest month-over-month decrease is expected.

 

5.  November Housing Starts & Permits — Tuesday

Housing starts for November are expected to decrease 0.2% month-over-month with an annualized starts number of 1.226 million versus 1.228 million in October. The average over the past year has been 1.262 million so a below-trend starts number is expected as well. Permits, which aren’t subject to the vagaries of weather which can impact the starts number, are expected to be 1.260 million versus October’s 1.265 million annualized. The average over the past year has been 1.313 million, so a below average print is expected with a slight sequential month decrease. In summary, the housing numbers are expected to show another month of ever-so-slight weakening levels with little to indicate a move higher.

New and Existing Home Sales

 

 

 


Technicals Investment Yield Ranges Over Last Year

 

US Treasuries

FHLB Agency Bullets

Mortgage Backed SecuritiesMunicipals

US Corporate - Financials

US Agency Swap Rates

 Source: Bloomberg

 

 

 


 

Tom Fitzgerald Signature

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

 

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