Interest Rates | NoisyRoom.net

By: Kent Engelke | Capitol Securities

As expected, the Federal Reserve raised its benchmark lending rate a quarter of a point and continued to project two more increases this year. A minority had thought that the committee would suggest three increases as possible in 2017 given sentiment and employment levels.

Because the monetary timeline was left unchanged, stocks advanced and Treasuries surged. The dollar fell and oil rallied.

Commenting on the Treasury market, was the advance fueled by short covering, the result of the committee leaving its 2017 and 2018 forecasts unchanged? All must remember that over 90% of the trading in the Treasury market is the result of algorithmic or technology based activity.

One can make the case because of the strong advance in Treasuries, more than a minority expected the Fed to change its monetary policy timetable and expectations.

As also indicated, oil gained over 2.25%, the result of a falling dollar and inventory levels. Inventories have been growing over the preceding weeks, growth I believe was the result of OPEC’s decision to pump all out in the months leading to the January 1 production cut.

I had verbally commented that inventories may be on the verge of declining because it historically takes about 45-60 days to ship the oil once pumped, thus suggesting the current production glut is in its final hours. The International Energy Agency (IEA) echoed a similar view Tuesday evening.

I also verbally remarked about falling super oil tanker rates, down about 45% from January 1, the result of empty tankers sitting idly with no charter rates. For about 30 months, tanker rates were achieving consecutive record highs, the result of strong demand from OPEC countries. Are falling tanker rates a harbinger of falling inventories? Logic and history suggest yes.

What will happen today?

Last night the foreign markets were up. London was up 0.92%, Paris was up 0.67% and Frankfurt was up 0.84%. China was up 0.84%, Japan was up 0.07% and Hang Sang was up 2.08%.

The Dow should open nominally higher. Oil is up on inventory drawdowns, the FOMC’s dovish message and a pro-European victory in the Netherlands. The 10-year is off 8/32 to yield 2.52%.

By: Kent Engelke | Capitol Securities

Did FRB Chair Yellen telegraph a strong labor report for Friday? Yellen commented “an interest rate increase would be appropriate at the central bank’s upcoming meeting if employment and inflation continue to meet policy makers’ expectations.”

Fed funds futures, which are a gauge of market sentiment, are now suggesting a 96% chance of interest rate increase on March 15. Seven days ago the odds were less than 40%.

As noted the other day, the markets have now discounted three interest rate increases for 2017, the amount the Committee suggested in late 2016. I do think it is noteworthy that at the start of 2016, central bankers expected to make four rate increases, but only did one and that was in December.

Because of these missed outlooks, many have become complacent about the risks within the sovereign debt markets; risks that I think are substantial. Several weeks ago, I opined about the possibility of more rate increases than expected because of stronger growth, the result of uncontained “animal spirits;” animal spirits that have been caged for over eight years because of regulatory zeal and crushing tax policies. This zeal/policy has now been perhaps caged if not reduced.

Is market focus now switching from attention to Trump’s proposals to data and how this data will affect monetary policy? This week is a heavy data week and if the markets respond to these statistics, the answer is yes.

As noted above, Friday the all-inclusive BLS labor report is released. Analysts are expecting a 4.7% unemployment rate, a 190k and 185k increase in nonfarm and private sector payrolls respectively, a 0.3% increase in hourly earnings, a 34.4 hour work week and a 62.9% labor participation rate.

Markets Friday were relatively unchanged with the exception of oil which rose about 1.5% as the major oil ports in Libya were seized by militants.

Last night the foreign markets were mixed. London was down 0.34%, Paris down 0.42% and Frankfurt down 0.37%. China was up 0.48%, Japan down 0.46% and Hang Sang up 0.18%.

The Dow should open moderately lower on monetary policy concerns. The 10-year is unchanged at 2.48%.