Daily Market Color

Yields, Dollar Rise as Fed Chair Race Heats Up

Hawkish Taylor Seen as Favorite for Fed Chair Treasury yields rose alongside the US dollar this morning after it was speculated that Stanford University economist John Taylor sits atop President Trump’s shortlist to be named the next Fed Chair.  It was reported that Taylor made a very strong impression during an interview with Trump last week, and as a result, has leap frogged Kevin Warsh as the favorite amongst the list of potential candidates, which also includes Jerome Powell, Gary Cohn, and Janet Yellen.  In the past, Taylor has supported a monetary policy rule which calculates the appropriate benchmark interest rate based on how well the economy is performing relative to the central bank’s maximum employment and 2% inflation goals.  In the current environment, Taylor’s rule would prescribe a Fed Funds rate of over 3%, leading investors to forecast a faster pace of future Fed hikes should Taylor be appointed.
Yields/swap rates edged 1-3 bps higher during today’s trading session, with the 10-year note yield holding above 2.30%.  The US dollar gained 0.2% against major currencies, led by a 0.5% rise against the pound which has been impacted by the recent struggles in Brexit negotiations.  All three major US stock indices held within a tight range throughout the day, highlighted by the DJIA briefly crossing the psychological milestone of 23,000.  Crude oil prices fluctuated in a close range around unchanged during the session.  WTI crude is currently trading 0.2% higher at just under $52/barrel while Brent crude is up 0.4% to over $58/barrel.    



Industrial Production Recovers Post-Hurricanes

US economic data from the Federal Reserve revealed factory activity rising last month for the first time since June, albeit the 0.1% increase was below expectations of +0.4%.  Overall industrial production climbed 0.3%, boosted by gains in the mining (+0.4%) and utilities (+1.5%) components, which recovered after being impacted by the hurricanes in August.  It was estimated that Hurricanes Harvey and Irma contributed to an overall reduction of 0.25% in industrial production.  Also detailed in the report, capacity utilization, a measure of current vs. potential output at plants, edged 0.2% higher to 76%.



Inflation Heating Up in the U.K.

Across the pond, economic data revealed consumer prices accelerating 3% during the month of September, the U.K.’s highest level in five and a half years.  The depreciation of the British pound since last year’s Brexit vote has been pointed to as one of the primary contributing factors, as the cost to import goods has climbed dramatically.  Speaking to lawmakers earlier today, Bank of England Governor Mark Carney acknowledged the appropriateness of an interest rate hike in the near future as economic slack continues to diminish.  According to a Bloomberg survey, the probability for a ¼ point MPC rate increase at its November meeting is currently near 76%.  The hike would bump the U.K.’s benchmark rate to 0.5% and represent the BOE’s first rate increase in more than a decade.            



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