Manufacturing Data, Fed Officials Bolster Rate Hike Outlook, Treasurys Decline

Upbeat manufacturing data and speeches from various Fed officials contributed to Monday’s market move with Treasury prices lower on the day.  Markit’s US Manufacturing PMI reading jumped 1.7 points between September and October, the largest increase since 2015.  The 53.2 level reflected one-year highs for new orders, order backlog and output, while input costs reached two year highs, signaling rising demand.  Further bolstering the case for a December rate hike, Fed Reserve Presidents Charles Evans and James Bullard addressed the current market environment in separate speeches today, both touching upon a strong labor market hindered by lackluster productivity growth.  While the expectation of a rate increase in the near term was affirmed, both suggested that over the next couple years rate policy would remain below historical trend as inflation seems unlikely to cause the Fed to raise rates very quickly.  Probability of a benchmark rate increase in December has inched up further to nearly 75% today. 

Prices of crude oil traded down to begin the week following a potential complication in the output-freezing agreement among oil-producing nations.  On Sunday, Iraqi oil minister Jabar Ali al-Luaibi requested that Iraq, OPEC’s 2nd largest producer, be excluded from production cuts when the terms are discussed at the November 30th OPEC meeting, citing how the country has been entangled in wars over the past few decades and is currently battling Islamic militants.  “We are fighting a vicious war against IS,” Luaibi argued as he sought to gain the same exemption that Nigeria and Libya have been granted.  Falah al-Amiri, head of Iraq state oil marketer SOMO, added that while current daily production in Iraq is around 4.7 million barrels per day, past wars have resulted in lost market share that would have placed daily output at over 9 million barrels per day.

Overseas, banks with operations in the U.K. have started the process of relocating offices out of the country, with several small British banks planning to relocate employees by year end.  The financial threat to UK-domiciled companies who may lose unfettered access to the European Union market, if Brexit negotiations over the next several years turn out unfavorably for Britain, is substantial.  Research has shown that restricted access would put 70,000 jobs at risk and could cost British financial firms as much as 40 billion pounds ($49 billion).  The pound has also erased a good portion of last week’s gain, trading as low as $1.22/GBP today.  

All three major U.S. stock indexes are currently 0.50%-1% higher on the day, fueled by the AT&T/Time Warner deal along with the anticipation of solid earnings releases, with over one-third of S&P 500 companies scheduled to report.  Treasury yields and swap rates are up 2-4 bps across the curve with the 10-year yield touching as high as 1.77%.  Both WTI and Brent crude are down roughly 0.6% for the day.