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September 16, 2015

Equities and Treasuries Both Rally in Cautious Trading Ahead of Fed

US Stocks and Treasuries both rallied marginally ahead of tomorrow’s all-important Fed rate decision.  A Reuters poll taken over the last 24 hours surveyed 80 economists based in North America and Europe asking if they thought the Fed would hike rates tomorrow.  The number of economists predicting no change outnumbered those expecting a hike by a narrow margin (45 to 35).  In an identical survey last week, a little over half of economists predicted the Fed would in fact pull the trigger.  It’s unclear exactly what swayed their thinking over the past couple days, but it underscores just how difficult of a decision the Fed has in front of them.  Of primary dealers polled, 12 expect the Fed to hold and the remaining 10 expect a hike.  Recent headline US data indicates the economy is performing relatively well, but it has been considered weak compared with past recoveries, with inflation and manufacturing underperforming.  Regardless of whether the Fed tightens tomorrow or speculation shifts to October, Fed policymakers are expected to lower their longer-term projections in light of recent global headwinds.

Underscoring the lack of inflation, today’s CPI report fell in August, largely due to the decline in gas prices and the strong dollar.  The 0.1% fall is the first decline since January.  The core CPI, which strips out volatile food and energy costs, increased only 0.1%, which reflects the impact of the strong dollar on the cost of imported goods.  The Fed has previously described the fall in gas prices and stronger dollar as transitory, but there haven’t been any predictions on record as to how long they will last.  A steady rise in inflation isn’t considered a prerequisite to hiking rates since it’s typically a lagging indicator, but the data doesn’t provide any sense of urgency either.

 

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