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It’s certainly been an interesting year already for financial markets, especially housing and interest rates. But most of what happened in the last eight months can be considered a more predictable phase of the post-pandemic market cycle.
Who can say the past eight months were predictable when interest rates rose at their fastest pace in decades and reached their highest levels in over 14 years? Exceeded most predictions. But the predictable phenomenon was closer to the general truth we know will correspond in the second half of 2021.
The Federal Reserve will shift gears on bond purchases in the second half of 2021, announcing a gradual curtailment of new bond purchases following a series of rate hikes. This shift away from the Federal Reserve has always been likely to coincide with rising interest rates and falling stock prices. It was the magnitude, speed, and staying power of the shift when I tried.
June’s Consumer Price Index (CPI, a major government inflation report) reading was the only major curveball of the year. This is commonly believed to be a by-product of the impact of the Ukrainian War on commodity prices. As seen in the chart below, that has resulted in a rapid reassessment of the Fed’s rate hike prospects.
The blue line is the market’s expectations for the Fed Funds Rate after the September meeting. Watch out for big leaps in June. To be fair, July’s inflation report caused another rally, but quickly returned to his previous range of 2.875% and has remained there ever since.
Long-term interest rate forecasts (December meeting and next June meeting) have had more ups and downs due to changes in the economic outlook. A weaker economy = lower long-term interest rates, all other things being equal. These long-term expectations are more analogous to long-term interest rates like mortgages.
Interest rates rebounded nicely in July as markets feared a recession, but rebounded sharply in August as data suggested a much more resilient economy. This is especially true of his ISM Purchasing Managers Index (PMI), such as the early August jobs report and a more timely and highly appreciated version of GDP split into manufacturing and non-manufacturing sectors. increase.
PMI data has caused some notable jumps towards higher interest rates over the past month. The same was true this week when the non-manufacturing (or simply “service”) version was announced on Tuesday morning. Services PMI was expected to fall to 55.1, but instead rose to 56.9, believing the market was trending down to ‘moderate’ levels, but effectively ‘strong’ historical territory. stayed in
Despite the GDP numbers being in negative territory and aggressive interest rate hikes by the Fed, other economic indicators point to the economy continuing to expand. PMI data helped push U.S. rates higher than overseas rates at a faster pace as U.S. traders returned from a three-day weekend, but the European Central Bank raises rates and warns of upside risks to the inflation outlook European interest rates took the lead on Thursday after the
While US economic data has certainly contributed much to the recent upward pressure on interest rates, European and European Central Bank policies are fueling the fire. This can be seen in the rapid rise in EU bond yields. By the way, the initial surge in the blue line (his decade in the US) in early August coincided with some strong US economic reports (ISM PMIs and Jobs Report).
Simply put, interest rates have plateaued twice and the market knows what high interest rates look like coupled with a strong economy. The bigger question is how subdued inflation is. Inflation is, after all, the reason the Fed keeps saying it’s trying to slow down economic activity through rate hikes. Looking at the year-over-year chart, it looks like the Fed still has a long way to go to get core inflation back on target.
But the year-over-year data is just that. This includes the last 12 months. Much of it contributes significantly to the inevitable much lower overall sum, even if the economy simply maintained its current monthly inflation rate. In fact, a 0.1% drop in core inflation in the next report would put the year-over-year numbers on pace to hit the target range. Once the Fed has some confidence that it’s happening, it can start considering a more friendly shift in monetary policy, which has put so much upward pressure on interest rates lately.
And that tells us why things are getting interesting. Summer is unofficially over. School has resumed. Traders are back at their desks. And next week brings us the next installment of CPI data. In just 6 business days, you’ll see the Fed’s next policy announcement and the latest rate hike forecasts from each Fed member.
All of the above is made even more interesting by the fact that the Fed itself, by its own admission, doesn’t know how much to raise rates in two weeks and can only decide after seeing the situation. It has become a thing. economic data. Given that the CPI is the most relevant economic data ever, and that the Fed has a policy of withholding public comment from 11 days before the meeting (i.e., today he has until 9/9 the Fed (It was the last day for comments on ). 21), the market reaction to his CPI data next Tuesday could be very interesting.
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