On Wednesday 26th September, the US Federal Reserve announced an increase in policy rates, its third 25bp increase this year, with market expectations very high of a fourth before the end of the year.
Attention will be focused on clues as to how many interest rate rises might be expected in 2019, and what the eventual peak may be (compared to the sorts of levels experienced at interest rate peaks before the Great Financial Crisis). With the economy trucking along pretty well, some hints of inflationary pressures building, and the Trump tax cuts and tariff impacts to come, some Federal Reserve Board doves are sounding quite hawkish.
However, with the dollar already strengthening from the impact of tariffs and monetary tightening, the Fed will not want to go too far – but the worry is that its hand may be forced by an unexpected surge in inflationary pressure.
It is this that has pushed the US Treasury 10 year yield higher to break through 3% fairly comprehensively in recent weeks, returning to levels last seen in 2011 before the Eurozone crisis.
The long bull market in bonds, looks to have decisively turned around, despite inflation staying low:
Meanwhile, the UK Chancellor has brought forward the annual budget day to 29th October – a Monday, oddly – about a month before its usual timing. This may be reflecting the current fractured state of the EU negotiations and will fall conveniently between the EU “moment of truth” summit on 18 October and the further summit to formalise a deal (the UK Government hopes) in mid-November. Could be a pretty interesting exercise for the OBR, let alone the Chancellor.