Will Markets Be Blindsided with an Interest Rate Hike?

You can tell that we are having serious concerns about the possibilities of an interest rate hike on March 15th (the end of the March FOMC meeting) as this is the 2nd time in 2 weeks we have written about interest rates.   We have been rooting for a rate hike for some time now and we think there may well be one next month.  So what is the problem?  The problem is that the marketplace believes that Yellen will chicken out once again.  Remember that it isn’t just the level of interest rates that is important to the market, it is the speed in which they are raised.  Additionally a hike is not such a big deal if it is expected, but there is little expectation of a hike in March.  The CME Fed Watch tool has moved from a 22% chance of a hike the last couple of weeks up to 33% today.  While that is a healthy jump it is a long way from indicating a real belief in a rate hike.  Let’s look at what needs to be watched in the next week or so to give us an indication.

Tomorrow we start off with the 2nd reading on 4th quarter GDP.  The 1st estimate of 4th quarter GDP growth was 1% and the consensus for tomorrow is 2.1%.  While this isn’t exactly a blazing growth number it is pretty much par for the course—anything much above the expected number will be favorable toward a rate hike.  Next Wednesday, March 8th, we get the ADP Employment report which is followed up by the February Employment Situation report on Friday the 10th.  The employment report is probably the most important report leading up to the Fed meeting.  In January 227,000 jobs were created and any number over 200,000 for February could be considered strong.  After these reports we get the FOMC meeting on the 14th of March which dovetails with the Producer Price Index (PPI) and followed by the Consumer Price Index (CPI) on the 15th–the day the FOMC meeting ends.  Both of these numbers ran “hot” last month with CPI at 2.5%–another number like that could push the FED over the edge for a rate hike.  It will be an interesting 2 weeks ahead as we watch the numbers.

So as we watch the numbers and are await the Fed decision what will we do to prepare?  Not much at all.  We recently had a number of redemptions (Hercules Capital  and Medley LLC baby bonds) and while we are anxious to re-invest we are going to hold off in case there is some type of panic which creates opportunity.  If that opportunity doesn’t come in the next 16 days we will need to re-invest cash proceeds so as to not miss out on too many dividends/interests payments.

We need to remember that the Fed controls short term rates and the marketplace will control longer rates–and with the 10 year treasury drifting down from the 2.55% area to 2.36% where it is at now.  It will be fun to watch rates for signs in investor sentiment as we wait for further developments.

 

 

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Bryan Perry

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