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November 19, 2015

Lift Off Unless New Data Proves Not Needed, Instead of No Lift Off Until Proven Necessary

Believers in an FOMC quarter point move in December continue to gain confidence, after recent Fed Governor speak and the release of the October FOMC meeting minutes.  The Fed minutes indicated that most voting members believed in October that either 1) there was already enough evidence that a December rate hike was warranted or 2) there would be sufficient evidence by December.  There was also concern expressed by several participants who feared that not making their first move in over 7 years at their next meeting would risk 1) showing a lack of confidence in the economy, 2) leaving more financial market uncertainty and 3) creating more of an imbalance in financial assets (i.e. asset bubble). As indicated in the Bloomberg chart below, the market is holding at a solid 68% likelihood of a Fed move on December 16th.

Treasury and Swap rates are lower this morning, with the yield curve flattening as 2 to 5 year yields are 1 to 3 basis points lower and 5 to 30 year yields are lower by 2 to 6 basis points.  In addition to this yield curve flattening, we’re also seeing swap spreads driven further negative this morning, as spreads from 3 years and out are all negative now – and most maturities are at the most negative spread level we have ever seen.  A lot of explanations have been posited for this phenomenon, including excessive corp. issuance being swapped, large volumes of swaps being used to replace a lack of duration assets, but regardless, this clearly benefits counterparties who have a need to pay fixed to hedge exposures against rising rates.

Oil is off again today with WTI trading back below the significant $40 per barrel level. Most other Energy, Ags and Metals markets are up, led by NYMEX Gas up 2% and ICE Coffee up 5%. The U.S. dollar is trading down roughly 0.5% against most major currencies, while U.S. stock markets are opening relatively closed to unchanged.

 

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