US Dollar Rises, Treasurys Fall With Hawkish Fed Commentary

Today the markets keyed in on hawkish Fed member comments made by Richmond Federal Reserve President Jeffrey Lacker, continuing the search for timing on future interest rate movements.  Although he is not a voting member of the FOMC until 2018, Lacker made it clear that his preference would have been to raise rates at the past September FOMC meeting, stating that the current labor market is close to the optimal level and expecting unemployment data due to be released this upcoming Friday to bolster this view.  Lacker additionally shared his view that the Fed should stay ahead of rising inflation rather than waiting for it to reach the 2% mandate level, as the possibility for an overheating of the economy poses a significant threat.  He argued that an excessive rise in inflation would then require aggressive rate hikes that could eventually lead to a recession.  Currently, core inflation has increased 1.7% on the year compared to 1.4% at the end of 2015.  Tonight, [some] investors will be tuned into the lone vice-presidential debate, to see if Republican VP candidate Mike Pence can help swing the pendulum back in Donald Trump’s direction in his debate with Democrat VP candidate Tim Kaine.   

Overseas, the British pound continued to fall to new 31-year lows against the dollar, giving up an additional 0.8% on the day to $1.27 / GBP.  An earlier-than-expected triggering of Article 50 along with an increased chance of U.S. Fed rate hike by year end continue to be themes that have sterling investors concerned.  The currency devaluation has helped push U.K. equities to a 17-month high today, however, with export stocks leading the way.  Providing additional color to the British forecast, the International Monetary Fund (IMF) announced its growth expectations for various nations today, pegging the U.K. with a modest 1.8% expansion in 2016 and a tepid 1.1% the following year.  Dwindling investor confidence following the Brexit was cited as one of the main reasons for the drop in growth outlook that stood at 2.2% in 2015.  Overall global growth in 2016 is projected to hit +3.1%, as per IMF officials.  Elsewhere, India’s central bank cut the benchmark interest rate by 25 bps to 6.25% in a surprise move by the newly established panel under Governor Urjit Patel.  The Reserve Bank of Australia acted in-line with expectations and left its cash rate unchanged at 1.5% today.    

All three U.S. stock indexes have been choppy throughout the trading session and are currently trading down 0.25%-0.50%.  Implications of an increased likelihood for a Fed rate hike have pushed Treasury yields/swap rates up 3-5 bps across the curve, with the yield on the 10-year Treasury note hitting a two-week high of 1.67%.  Brent and WTI crude prices are just above flat for the day, trading at $51/barrel and $48.90/barrel, respectively.