In the weeks leading into the next Federal Research policy meeting, various government officials expressed interest in rates staying the same. That expression of interest included the U.S. President.
Bond markets ignored politics during that time. The U.S. 10Y Treasury (IEF) closed last week at 4.971%. Compare that to a sub-4.0% rate on February 27 and before the U.S. and Israel bombed Iran.
Late last week, the Houthis opened a second front. It seized an island in a key strait. That adds to blockades and disruptions for ships. The Strait of Hormuz accounted for around 20% of global oil shipments. The capture of the entrance to the Red Sea might raise oil prices to new highs.
The Fed will need to quantify how temporary high oil prices are in the economy. The war shows no sign of easing. That sent ExxonMobil (XOM) around 5.9% below its 52-week high of $176.41.
In the August Consumer Price Index report posted last week, the Bureau of Labor Statistics published a 0.4% increase. In the last 12 months, the all-items index rose by 3.4%. Stock markets rallied while bond yields eased, since the inflation figures met expectations.
Rate Hike Odds Rose
The CME FedWatch tool doubled the odds of a 25 bps rate hike this Wednesday to 87%. Stock markets are also bracing for an increase. Royal Bank (RY) fell in the last two months, while JPMorgan Chase (JPM) risks breaking down from its trading range.
The economic data favors a rate hike, while the upcoming midterms might convince the Fed to wait until the next meeting.
