Fed Meets, But Expected to Ignore Recent Strong US Economic Data

Over the last several months, the US economic data released has been consistently strong, but that is unlikely to have any sway over near term Fed policy as they began their 2 day FOMC meeting.  We have seen firming market indicators of late from Housing, Consumer Confidence, Purchasing Managers and many other economic data points.  Today’s latest signs of domestic economic strength included the release of New Home Sales which were up more than twice the month-over-month growth rate that was expected (+3.5% act. vs. +1.6% exp.) while the Consumer Confidence index also beat expected levels (97.3 act. Vs. 96.0 exp.).  That said, the Fed is nearly unanimously expected to take no action as far as rates are concerned, when they release news of their meeting’s decisions tomorrow.  Some market participants are anticipating a more hawkish tone by the Fed on the back of a strong June payroll print about a month ago.

Meanwhile, USD LIBOR has continued to edge higher in the US.  We have seen a 8 bps move up in 3 month LIBOR since early July (see Bloomberg image below).  A research report published by Credit Suisse attributes the steepening of the LIBOR curve to investors moving out of prime funds into money market funds.  The report notes that this outflow, about $30 bln just in the past week, has been due to the Money Market Fund reform, which has motivated investors to shorten their weighted average maturities going into the October 14 implementation date for the reforms.

Stocks today are generally lower with the stock indices down about 0.25%, with McDonald’s and 3M leading the way down.  Currency markets are seeing the biggest move from the Japanese Yen, which is up 1 – 1.5% vs. most major currencies as recent statements from the Bank of Japan dampened expectations for more near term monetary stimulus there.  Oil is continuing the recent slide, with WTI Crude prices down 6 of the last 7 days to around $43 per barrel currently, the lowest level in the last 3 months.

US Treasury yields are trading in the range of mostly unchanged to down a couple of bps in yield today – with the 10 year Treasury hovering at 1.56%, while US swap rates are down 1 to 2 basis point as swap spreads have tightened slightly.