Markets priced in the December rate hike with tremendous vigor

Outlook

Markets priced in the Dec rate hike with tremendous vigor. This is a little surprising because expectations of the hike were pretty solid beforehand. We have to ask how much is too much? It depends on two things—first, whether the market is pricing in too much inflation over too long a horizon.

This takes us into the weeds of alternative statistical methods and the hideously unreliable consumer and business surveys. If we have to judge, we’d say the Atlanta Fed sticky inflation is probably the thing to watch. But also, remember how fast inflation came down even before Covid was over. Does the oil price crisis take the place of Covid and when it is resolved, will we see the same price deceleration?

The second thing is how the bond market behaves. Before we got the CPI, we saw plenty of commentary worrying about the yield curve inverting, meaning recession. As of 8:05 am EST, the 2-year yields 4.784% and the 10-year, 5.022%. Flip those around to put the 2-year above the 10-year, and the not only do markets freak out, but the Fed gets a story as to why it shouldn’t raise rates. We are not there and probably won’t get there, but nerves are jangling.

Today we get the usual weekly jobless claims,a 30-year bond auction, and no fewer than five Fed speeches. We also get earning from Cisco and others.

Forecast

The outcome of the Nvidia scandal and the sector’s response may be a big factor today and tomorrow. It won’t derail the dollar, but may result in a flight to Treasuries, which does affect the dollar.

At a guess, the five Fed speeches will be parsed for every nuance. We already have two voting members saying maybe 50% or maybe two hikes. Another five in that direction would be a strong dollar tailwind.

US Politics: Mississippi elected its first black senator since 1874.  We still await whether the Native woman wins the Alaska senate race.