US Treasury bond prices dropped sharply last Friday, sending yields higher as fixed-income investors became more concerned about the increased potential for a rise in the federal funds rate sooner rather than later. In the United States, the market-implied probability that the Federal Reserve will increase the federal funds rate after the Federal Open Market Committee meeting later this month has doubled over the past month; however, even after doubling off a low base, the market is still pricing in only a 24% probability that the Fed will raise the rate this month.
Developed market government bonds sold off last week, sending yields higher
While it is unlikely that the Fed will act in September, the probability of a rate increase in the December meeting rises substantially. As December is the first meeting after the presidential election, the Fed will have a greater sense of freedom to act. The current concern is that if there is a significant market impact on financial assets, the Fed could be accused of influencing the election.
Sovereign bonds in the global developed market also sold off last week, sending yields to their highest levels over the past few months, although, in many cases the sell-off only brought yields back up to 0% after being negative since mid-June. Despite market rumours to the contrary, the European Central Bank held its monetary policy steady after its meeting last Thursday.
Many prognosticators had opined that the ECB was considering loosening its already historically easy monetary policy by increasing its asset-purchase programs and/or lowering interest rates even further into negative territory. Some investors were disappointed by the lack of action and decided to reduce sovereign bond positions in the expectation that bond prices could fall further. In their view, without an increase in bond buying by the central bank, bond prices may not be able to hold their current levels.
US Employment Data Starting to Look Worrisome
By Morningstar Director of Economic Analysis Bob Johnson
We have had a relatively favourable view of the economy and tend to view the U.S. economic glass as half-full instead of half-empty. However, the combination of last week's slow employment report, this week's job openings report, and slowing in some of our favourite growth sectors – autos, airliners, and shale oil and gas production, is making even us a little worried. Some caution seems warranted. The softness may, however, merit lower rates for longer, which could cheer markets.
Although most economists agreed that the headline job gain of 151,000 looked a little soft versus expectations of 180,000 or so, it certainly was no disaster, especially for the accident-prone month of August. Most analysts focused on the fact that the number might be low enough to keep the Fed from raising rates. A few others noted that hourly wage growth year over year decreased from 2.7% to 2.4% between July and August, also potentially quelling potential Fed Fears.
However, we think these analyses miss the real point, which is that combining slower overall employment growth with the shrinking hours worked paints a relatively bleak picture, if not quickly reversed.
