Daily Market Color

Yield Curve at its Flattest in a Decade

Inflation Expectations on the Rise

A light day of economic data releases was headlined by October’s producer-price index for final demand, which reported inflation for US businesses at a robust +0.4% MoM.  The reading exceeded estimates of + 0.1% and matched September’s level, driven by the largest increase in service costs since April.  Looking at overall producers’ price inflation it has increased 2.8% over the past 12 months, while core prices have risen 2.3% over that same period.  As producer prices can often be a leading indicator for consumer inflation, today’s release represents a positive signal for consumer price growth ahead of tomorrow’s CPI release, where median forecasts call for a 2.0% YoY gain in the overall CPI index and a 1.7% rise in core CPI.



Yield Curve Flattens Further

The yield on the two-year Treasury note climbed again today, touching as high as 1.695%, while the long end of the curve rallied, with the 10-year note yield falling 3 bps to 2.38%.  The yield curve is now approaching its flattest level in nearly a decade as investors prepare for a December rate hike by the Fed, the probability of which has increased to nearly 97%, as per the CME Fedwatch tool.  Also contributing to the flatness of the curve, uncertainty over the details and timing of US tax reform continues to hold long term rates in check.  The latest update out of Washington came from Senate Republicans, who today signaled they would be seeking a repeal of the ACA requirement in their tax plan, adding further complexity to an already opaque policy timeline.      



Crude Rally Reverses on Demand/Output Projections

This morning a report from the International Energy Agency referenced a cut in the global oil demand forecast for the next two years.  A demand reduction of roughly 100,000 barrels per day was predicted by the IEA, dropping the 2017 outlook to 1.5 million bpd and 2018 expectation to 1.3 million bpd.  The data was coupled with the projection that US oil production will surge over the next decade, with American output mirroring that of Saudi Arabia’s peak levels by 2025.  IEA Executive Director Fatih Birol stated that “The United States will be the undisputed leader of global oil and gas markets for decades to come.”  Futures in crude oil and natural gas finished down more than 2% on the day.     



The Rollback on Bank Regulation Continues

A bipartisan group of senators have come to agreement on rolling back some of the Dodd-Frank regulations. The agreement would move the threshold for “systematically important financial institutions” (SIFI) from $50 billion to $250 billion, reducing the number of institutions subject to extra oversight.  Under the agreement, banks with assets between $50 billion and $100 billion would be exempt from SIFI status immediately, while those with assets between $100 billion and $250 billion would not be subject to the exemption for 18 months. This change would reduce costs significantly for exempt institutions as well as relieve pressure for banks that are near the $50 billion asset threshold.
In addition, the group agreed to exempt banks with less than $10 billion from the Volcker Rule, which is extremely welcome news. This will enable smaller institutions to engage in business without the worry of violating the nebulous proprietary trading restrictions in the rule as well as reduce costs.
The bill has not yet come to a vote, but it believed to have adequate support since there is backing by both parties.

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