The market goes into the new week treating a December Federal Reserve rate increase as the base case. Futures pricing put the chance of a quarter point hike at the December 8 to 9 meeting at about 77 percent after Friday’s employment report, according to CME FedWatch data reported by HedgeWeekly, and Reuters reporting put the figure at about 78 percent on Friday afternoon, up from 66.9 percent the day before. A December move would lift the target range from 3.75 to 4.00 percent to 4.00 to 4.25 percent.
The repricing followed the October payrolls beat, 165,000 jobs against forecasts near 65,000 with unemployment at 4.1 percent, covered on this site on November 6, and the split among officials that followed it, covered on November 7. What Friday’s trading did not do was run away with the long end: the 10 year Treasury yield closed at 4.86 percent, up 2.2 basis points on the day but down 7.0 basis points on the week, the five year at 4.65 percent, up 4.0 basis points on the day and down 7.3 on the week, and the 30 year at 5.26 percent. The dollar index rose 0.74 percent on Friday to 102.3. The week’s haven bid is still in the market even as the policy pricing hardens.
Two tests arrive before the meeting, and the first is on Tuesday. The Bureau of Labor Statistics publishes the October consumer price index on November 10, the last full inflation read the FOMC will have in hand alongside the November employment report due December 4. A hot print would validate the priced hike and the officials arguing for one; a soft print is the one development that could pull pricing back toward the two thirds level of a week ago.
Supply runs in parallel. The Treasury’s November refunding, announced November 4, sells 125 billion dollars of securities this week to refund about 97 billion dollars of privately held notes and bonds maturing November 15 and raise about 28 billion dollars of new cash: a 58 billion dollar three year note on Monday November 9, a 42 billion dollar 10 year note on Tuesday November 10 and a 25 billion dollar 30 year bond on Thursday November 12, all at 1:00 p.m. Eastern and settling November 16. With the 10 year at 4.86 percent and December priced as a hike, the auctions will show whether duration demand at these levels is as deep as the week’s rally implied.