Market Update: Stage set for December liftoff
This week we’ve seen a full lineup of Fed speakers predicting the market to be ready for the first rate hike in December. Most economists believe the Fed will increase rates by 25 Basis Points (BPS) in December. This is also confirmed by the markets, with Fed Funds Futures pricing in a 68% probability of a hike. What happens after December is still uncertain.
For the Fed officials the December rate hike is confusing, with the the constant instability abroad. Concerns include terrorism, the civil war in Syria or concerns about the European and Chinese economy. Despite these events, the economy has met the Fed’s goals of full employment and is now “comfortable with moving off zero soon”, according to Fed speaker Lockhart. Further, according to Vice Chair Fischer, the Fed has done everything it could “to avoid surprising the markets and governments when we move”.
For rates, we may not see much of an impact, particularly for the long end (maturities greater than 5 or 7 years). It’s surprising to see mortgage rates rise more than .50 percent, at least for a meaningful amount of time. The 10 year trading rate is also between 2.12 and 2.30 percent.
Oil prices have been getting crushed for most of 2015, with crude trading below $40 per barrel this week for the first time since August. This can contain inflation and give a boost to consumers. Perhaps 2016 is the year we finally start to see some inflation in wages. We already know that a significant portion of the unemployed don’t even want jobs. Competition for people that do want them is extremely intense.
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