Demand Imbalance Arbitrage

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Fed Hikes Interest Rates in Response to Rising Inflation Expectations

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It is anticipated by economists that the total consumer price index will experience a 0.5% increase in January, following December’s 0.1% rise, which has been revised upwards.[0] The annual rate is projected to decline to 6.2% from 6.[1] It is predicted that the core Consumer Price Index (CPI), not including food and energy, will[2] This would bring the core CPI inflation rate down to 5.5%.[1] This reading suggests that the Federal Reserve will be more likely to continue raising interest rates in the near future, resulting in the market adjusting its predictions for the final interest rate the central bank will adopt.[3]

On Tuesday, Treasury yields rose, with the two-year note rate seeing the largest increase, climbing up to 4.64%, the highest since November and close to last year’s multiyear high. This rate is more sensitive to Fed policy changes than longer maturities. Yields for three- and five-year investments reached their highest point in 20[4] As the day went on, rates stayed at high levels, but they could go even higher during Asia’s trading hours.[4]

On Tuesday, the 10-year U.S. treasury yield increased to 3.76%, bouncing back after dropping the previous day. On Wednesday morning, the 10-year yield increased to 3.78% following the publication of the retail sales figures.[5] The yield of the 10-year Treasury increased by 5 basis points to reach 3.81%, the highest level since However, short-term rates, which are more closely tied to the Federal Reserve, did not fluctuate much.[6] It is anticipated that the Federal Reserve will raise interest rates by a quarter of a percentage point at both the March and May meetings.[6] On Wednesday, the likelihood of a third interest rate hike occurring in June or July decreased slightly, although markets still favor it.[6]

At the Economic Club of Washington, D.C. last week, Jerome H. Powell, Federal Reserve Chair, warned that the journey to reduce inflation is likely to be “not going to be continued. It’s probably going to be bumpy.” and not “continued”.[7] He noted that the unexpectedly strong January jobs report had validated his expectation, and he added that if economic data were to exceed expectations, “we would certainly raise rates more” than currently thought.[7]

Thomas Barkin, President of the Richmond Fed, remarked that “if inflation persists at levels well above our target, maybe we’ll have to do more,” while Lorie Logan, President of the Federal Reserve Bank of Dallas, expressed that “we must remain prepared to continue rate increases for a longer period than previously anticipated.[3][3]

0. “The 6-Month T-Bill Breaches 5%. It Hasn’t Been This High Since 2007.” Barron’s, 14 Feb. 2023, https://www.barrons.com/articles/treasury-bill-six-month-interest-rate-5782c7a1

1. “Fade The CPI; Here’s What Matters To The Fed, S&P 500” Investor’s Business Daily, 13 Feb. 2023, https://www.investors.com/news/economy/fade-the-cpi-inflation-report-what-matters-to-the-fed-sp-500

2. “U.S. inflation is likely ‘far stickier’ and could last a decade, Bill Smead says” CNBC, 14 Feb. 2023, https://www.cnbc.com/2023/02/14/bill-smead-us-inflation-is-far-stickier-and-could-last-a-decade.html

3. “Fedspeak, U.S. retail sales, U.K. inflation, Apple stake – what’s moving markets By Investing.com” Investing.com, 15 Feb. 2023, https://www.investing.com/news/economy/fedspeak-us-retail-sales-uk-inflation-apple-stake–whats-moving-markets-3003762

4. “Traders Capitulate, Abandoning Fed Rate Cut Bets After CPI Spike” Yahoo News, 14 Feb. 2023, https://news.yahoo.com/traders-capitulate-abandoning-fed-rate-213611625.html

5. “Dow Jones Drops 200 Points On Strong Retail Sales; Tesla Reverses Lower Despite Buy Rating” Investor’s Business Daily, 15 Feb. 2023, https://www.investors.com/market-trend/stock-market-today/dow-jones-futures-fall-ahead-of-retail-sales-tesla-stock-races-higher-on-buy-rating/

6. “Dow Jones Futures Fall But Market Rally Keeps Climbing; Shopify Leads 10 Earnings Movers | Investor’s Business Daily” Investor’s Business Daily, 16 Feb. 2023, https://www.investors.com/market-trend/stock-market-today/dow-jones-futures-market-rally-keeps-climbing-shopify-roku-cisco-are-key-earnings-movers

7. “CPI: Prices rise 6.4 percent in January, seventh month of easing inflation” The Washington Post, 14 Feb. 2023, https://www.washingtonpost.com/business/2023/02/14/inflation-easing-cpi-january/

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