October Rate-Hike Odds Just Fell From 51% to 19% in One Week
Fed rate-hike odds swung violently in a single week, but the jobs data behind that swing raises as many questions as it answers, and long-bond investors may be celebrating too soon.
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Market-implied odds of a second straight Federal Reserve rate hike at the October 28 meeting fell to 19.4%, down from 50.9% a week earlier. That leaves an 80.6% chance the Fed holds its rate in the 3.75% to 4.00% range.
Traders pushed the hike back rather than dropping it, and they still price in roughly a 70% chance of a quarter-point increase by the December 9 meeting. The SPDR S&P 500 ETF (NYSEARCA:SPY) rose 0.56% on October 6 to 779.14, while the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) lost 0.82% over the week the odds collapsed.
What Moved the Odds Between September 29 and October 2
New York Fed President John Williams said on September 29: “With the policy action we took at our September meeting, there is no need for urgency, and we have time to gather more information.” Governor Michelle Bowman added on October 1: “I don’t currently see an urgent need for further action.”
The jobs report on October 2 pushed odds lower. Payrolls grew by 29,000 against roughly 90,000 expected, unemployment rose to 4.2% from 4.1%, and hourly earnings rose 0.1% for the month and 3.0% from a year earlier.
In September projections, twelve of eighteen officials saw one more hike this year, four saw two and two saw none, and Williams said: “one further upward adjustment of the federal funds target range may be appropriate late this year.” The market shifted its view on timing, although the Fed’s projections still pointed to another hike.
For SPY, a delayed hike removes one near-term drag. The fund is up 14.25% year to date.
For TLT, the two-year Treasury yield fell to 4.79% on October 6 from 4.84% a day earlier, but the 30-year sat at 5.64%, above its 5.61% on October 1. Long yields tend to track inflation expectations and Treasury supply more than the next meeting, and TLT is down 5.62% over the past month.
Reality Check: Odds Were Falling Before the Jobs Report
Odds topped out at 77.5% on September 24. They had fallen to roughly 40% by September 30, before payrolls landed.
The weak payroll count sits awkwardly beside initial jobless claims of 197,000 for the week ending September 26, a level that signals a tight labor market. Payroll figures get revised, and one report is thin evidence of a turn.
The harder problem is a Fed weighing hikes while hiring slows. Price pressure argues for tighter policy, but softer jobs argue against it. Lower hike odds driven by weak hiring are a weaker foundation for stocks than odds driven by beaten inflation.
Why a Delayed Hike Leaves TLT Exposed
TLT’s outlook remains weak. TLT holds bonds maturing in 20 years or more, carrying inflation and supply risk that a delayed quarter-point hike does little to ease.
Short-term Treasury bills carry a different risk profile for income tied to a slower Fed. On October 6, 13-week bills yielded 4.15% and 52-week bills 4.46%, with far less price risk than a long-duration fund charging 0.15% a year.
Fed minutes arrive October 7, but the real test is September consumer prices on October 14. If that report runs hot and October hike odds climb back above 50%, the delay call was wrong; if the 30-year yield closes below 5.61% after the release, the case for TLT improves.
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Omor Ibne Ehsan is a writer at 24/7 Wall St. He is a self-taught investor with a focus on growth, cyclical, and dividend equities that have strong fundamentals, value, and long-term potential. He also has an interest in high-risk, high-reward investments such as penny stocks.
