Hawkish Yellen Comments and Strong US Data Boost December Rate Hike Expectations

Stocks fluctuated while Treasuries and swap rates continued to sell off across the curve as markets reacted to hawkish comments from Fed Chair Yellen and a variety of economic reports.  In her testimony before the House Financial Services Committee, Yellen stated that the economy is “performing well” and December is “a live possibility” for a potential rate hike.  Yellen specified that a hike would only occur if the incoming data supports the Fed’s expectation that “the economy will continue to grow at a pace to return inflation” to the Fed’s target “over the medium term”.  In other words, the next few weeks of data will be crucial.  Yellen also reiterated that the Fed will take a gradualist approach to raising rates once liftoff begins in order to protect the housing market.

Today’s US economic data largely supported the notion that the economy is strong enough to support an interest rate increase.  The ADP employment report showed 182,000 jobs were added in October, below September’s downwardly revised 190,000 print, but above the 180,000 consensus.  While the headline number technically shows a slowdown versus last month, it shows the economy is still creating close to 200,000 jobs per month.  A moderation of the job market is to be expected given the headwinds in the energy and manufacturing sectors.  The 182,000 print is well above last month’s more closely followed Non-Farm Payroll report, and some economists predict the August and September NFP will be revised higher with the October report on Friday.  Separate reports showed the US trade deficit narrowed sharply off the back of stronger exports, while the US service sector surged in October.

Aside from the busy data calendar and Yellen’s testimony, traders will monitor comments from NY Fed President Dudley (dove, voter) at 2:30pm ET, and Fed Vice Chair Fischer (dove, voter) at 7:30pm ET.  Corporate earnings and issuance also remain robust.