Fed Eyes PPI Before FOMC
The last piece of economic data traders will see before today’s Fed meeting is expected to show that inflation is starting to be tamed, at least on the wholesale level. This morning, the Labor Department will release the producer prices report for August, with analysts estimating a drop of 0.3% on the headline number, with the so called “core” rate – which excludes food and energy prices – expected to climb by a modest 0.1%. A subdued reading on inflation should make the Fed’s decision to lower rates a bit easier, as it can better justify a rate cut if there are signs that inflation is starting to ease due to slower economic growth.
Two-year Note futures prices have slid the past several sessions, as the market has lowered its expectations for a 50 basis point rate cut in today’s FOMC meeting. The cash Two-year Note was yielding 4.06% in morning trade in London. Even if the Fed only cuts rates by 25 basis points today, the market is still anticipating further rate cuts, with a 45% chance that the Fed Funds rate could fall as low as 4.5% by year’s end. The Fed Funds rate currently stands at 5.25%.
Looking at the daily chart for the December Two-year Note, we notice the price slide after yields fell to their lowest levels in nearly two years. Despite the recent correction, prices continue to hover just above the 20-day moving average, and momentum has moved to a more neutral stance – the 14-day RSI currently reads 49.72, after being as high as 74.67 just a week ago. Support is seen at the 20-day moving average around 103-0800, with resistance at the recent highs of 103-252. In early trade, the December Two-year Note is trading at 103-097, down 0-012.
Mike Zarembski, Senior Commodity Analyst
