The two-day bounce in U.S. stocks stalled today. The Standard & Poor’s 500 closed down 0.67% and the NASDAQ Composite was down 0.40%.
Why?
Increased sentiment that the Federal Reserve will raise its target short-term interest rate by a hefty 75 basis points at its November 2 meeting and its December 14 session.
While the 75-basis-point increase at the November 2 meeting has been expected for some time, the shift in sentiment for the December 14 meeting is new.
The odds of a 75-basis-point increase at the November 2 meeting stand at 95.1% today, October 19, according to the CME FedWatch tool. That’s just slightly below the 95.9% odds yesterday and up modestly from 84.5% a week ago.
The odds of a 75-basis-points increase at the December 14 meeting have oared in the last few days. CME FedWatch puts the odds at 77.4% today. That’s up from 64.3% yesterday and 32.5% only a week ago.
One reason is that Fed officials are now consistently talking about raising interest rates above what looked to be the peak just a month ago. For example, Minneapolis Fed President Neel Kashkari said yesterday that the central bank can’t pause its tightening campaign once its benchmark rate hits 4.5% to 4.75% if “underlying” inflation is still accelerating. That has led to initial forecasts that the Fed’s peak rate may now be 5% or higher. (My own estimate, given signs of how sticky inflation is proving to be, is that we will see a peak rate of 6% in 2023.)
With those forces at work, prices of U.S Treasuries have fallen today with yields rising. The yield on the 10-year Treasury has climbed to 4.11%, up 11 basis points on the day (and 60 basis points in the last month.) The yield on the very-Fed-rate-sensitive 2-year Treasury moved higher to 4.54% today from 4.44% yesterday.
