Market Update: December rate hike in play

Last week, the Federal Open Market Committee (FOMC) left rates unchanged, but surprised the market by reopening the door to a December rate hike. Important changes to the statement included downgrading the overseas spillover effects to the US economy and affirming the strength of the US consumer.

Additionally, the statement largely ignored recent weakness in economic data, further increasing the market’s expectations for a December hike.   According to the statement, the FOMC will be determining “whether it will be appropriate to raise the target range at its next meeting”. Since the release, Fed futures are pricing in a 50% chance of a December rate hike, up 33% since the FOMC statement.

The selling in the bond market since the FOMC statement has continued to lead toward higher rates to start off the week.  The yield on the benchmark 10yr note has increased to 2.18%, its highest yield since late September.  Mortgage rates continue to grind higher with 30yr rates increasing about 12bps since the statement.  Generally, mortgages have outperformed Treasuries in the selloff as investor concerns about prepayment speeds subside.

One of the key data points the FOMC will be watching is the US employment report, which will be released on Friday of this week.    Currently, economists estimate that labor market conditions improved last month.  They are expecting to see a rise in Nonfarm Payrolls of about 40 thousand jobs in October and for the Unemployment Rate to have fallen by .1% to 5.0.  If the actual numbers released Friday are close, we can expect bond prices to continue to slip and for odds of a December increase to continue to rise.

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