Daily Market Color

Commentary on “Neutral Rate” Rattles Financial Markets


Powell Comments Push Risk Assets Higher, Rates Lower

Federal Reserve Chairman Jerome Powell’s comments that rates are “just below the neutral range” led to an equity rally (S&P +2.30%) as investors interpreted that to mean that the Federal Reserve will slow their rate of hikes in 2019. In spite of his comments, and the market reaction, Chairman Powell still emphasized that US monetary policy is not on a “preset” path- yet another reminder that predicting rate hikes far into 2019 could be quite challenging. Near-term, the market continues to price in an 80% chance of a hike at the last Fed meeting in December.



Swap and bond yields moved as expected on Powell’s comments, moving lower during a choppy session where 10-year bullet swap rates peaked at 3.13% before falling and ending the session at 3.10%.


Overseas Risks Still Linger

The Federal Reserve also identified several near-term risks to the US financial market. A “hard” Brexit and a sovereign debt crisis in Italy topped the list, though Chairman Powell also noted that asset prices in equities, commercial real estate and farmland valuations appear elevated. Despite those risks, the Federal Reserve sees the US financial system as well-capitalized and highly resilient to any contagion from overseas. The continuing trade conflict with China was not mentioned by the Fed, but that is one overseas risk that decidedly remains at the top of investor’s minds.



US Crude Continues Slide after Inventories Rise

US crude oil slid 2.42%, closing 44% below its October peak after oil inventories in the US grew by 2.75 million more barrels than expected. In opposition to the President’s current stance, the US Senate is moving to vote on a resolution that would withdraw US support for the Saudis in their conflict in Yemen. If such a resolution were to pass, that could greatly complicate the US / Saudi Arabian economic and political relationship. Elsewhere Vladimir Putin said that Russia may cooperate with OPEC in an attempt to raise the price of oil to $60/barrel- further muddying the geopolitical picture and the outlook for oil prices.


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