Brett F. Ewing Quoted in Barron’s

Treasury Yields Slip Following Fed Minutes

Treasuries finished largely lower following the release of minutes from July’s FOMC meeting, which showed officials split over the timing of the next rate hike.

The price for two-year Treasuries rose 1/32 to 100 1/32, pushing down their yield 0.008 percentage points to 0.738%. Ten-year T notes saw prices climb rose 6/32 to 99 15/32, sending their yield  0.019 percentage points lower to 1.558%.

Thirty-year bonds also saw their yields fall on higher prices, but yields on shorter duration notes—one-month, six-month and one-year Treasuries—ended higher today.

Analysts are starting to weigh in on the minutes. Aberdeen’s Patrick Maldari sees a December rate hike as the most likely outcome:

It seems that policymakers were split on their views of the direction of near-term monetary policy. The debate appeared to be whether or not the job market would tighten further and if that would lead to inflationary pressures. However, some members voiced skepticism as to the impact on inflation. Some members felt that given the current low inflation readings, they would have ample time to act. FOMC members viewed near-term risks to the U.S. economic outlook as having diminished, but some noted that the uncertainty surrounding events in Europe after the Brexit vote could certainly affect the condition of U.S. financial markets

First Franklin’s Brett Ewing sees the Fed ready to raise rates, but probably not until after the election:

The September meeting rate hike has undoubtedly been put back on the table because of the impressive labor results, but we continue to feel that the Fed will postpone a rise in the funds rate by citing continued concerns from Brexit and the longer term weakness in the labor market conditions index.  Historically speaking, the Fed chooses not to raise rates in a presidential election year, but because of the lead Hilary Clinton holds in the polls, we believe markets have been able to begin pricing in the election results. If this holds and Hilary wins in November, we will likely see the Fed raise rates just in time for Christmas.

Jefferies’ Ward McCarthy said the minutes showed no consensus among members:

In contrast to the Minutes to the June 14-15 FOMC meeting, which were overwhelmingly dovish, the Minutes to the July 26-27 FOMC meeting leaned somewhat hawkish, but also remained very cautious.  The FOMC is considering another rate hike, but wants more data on the temperature and the current before dipping its toes back into the rate normalization water.  We anticipated that the most important function of the Minutes would be to put the assessment of “diminished” risk tot the economic outlook into the appropriate policy context.  The Minutes failed to do so because there is no consensus on the balance of risks. Esther George also gets to the heart of why the market may have become “complacent” about the likely trajectory of rate hikes.

The Lindsey Group’s Peter Boockvar took a dim view of the delay:

Let’s be honest, this is the same noncommittal committee that we’ve seen for years. A committee that missed their chance to hike years ago but now so desperately wants to prove the validity of their 7 year strategy with more rate hikes. Their credibility is certainly at all time lows I argue. The markets won’t believe another rate hike until they see another rate hike that much is clear.

UBS’s Drew Matus is also expecting a December hike:

The “wait and see” theme is a recurrent theme for the FOMC. We expect committee members will want sustained evidence of progress in the labor market as well as some evidence that inflation will migrate higher over time. Since the July meeting they have gotten some supporting evidence regarding the health of the labor market, but inflation remains less robust than they would likely prefer to see. These factors argue for a slow path toward tightening. We continue to expect a December rate hike.