Friday October 20, 2017 - 15:09:30 GMT
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Catalonia Independence Heating Up; Fed Rate Hike Odds Rise
John M. Bland, MBA
Catalonia Stands Up To Madrid On Thursday, the Catalan President, Carles Puigdemont, stood up to Madrid by refusing to drop its independence claim for the region. Spanish PM Mariano Rajoy said his government (Spain) said it would move ahead with its threat to suspend the powers of the regional administration. Madrid said it would hold an emergency Cabinet meeting on Saturday, October 21st to begin process of suspending Catalan autonomy under Article 155. Rajoy plans to go ahead with Article 155 procedures to restore rule of law in Catalonia. Following Cabinet meeting, this declaration would go to Senate for a vote after at least three days (this means Tuesday?). The Catalan President will be given time to “clarify” that he will not be declaring independence until the Senate meeting. At the meeting he will be given an opportunity to defend his position. This means that next Tuesday looms as the next major deadline for Catalonia.
Markets continue to take the Catalonian situation mostly in stride. We have seen short bouts of flight to safety demand in German bunds and U.S. Treasuries. Curiously. The DAX has been seeing lower interest rates as a positive. The EUR has been taking this potential political instability in Spain in its stride. This could become a forex factor should political tensions start to escalate to tensions in the streets.
Better Sentiment About The U.S. Economy Driving Rates Higher The general tenor of U.S. data has been on an improving path now that we are working through the distortions in economic statistics generated by the major hurricanes this year. As the economic statistics start to normalize it becomes evident that economic growth has continued to improve, which means that a Fed rate hike in Mid-December is becoming near certain. There is also a Fed meeting on November 1. Professional Fed watchers mostly see no rate change at that meeting, but there is some chatter by other observers about a rate hike at that meeting, but given the recent disappointing inflation performance (low inflation) an earlier rate hike has to be viewed as a long shot at best. The yield on the 2-yr note is a good measure of market sentiment about Fed policy. It stood at 1.26% on September 7and was last at 1.55%. That is an increase of 29bps in six weeks. By way of contrast, the 10-yr less 2-yr spread has declined to +77bps from +82bps , indicating that markets are anticipating a Fed policy move. Fed Funds Futures Odds For a December 13 25bp rate hike are now running at close to 80%. This market bias typically would be USD constuctive.
Amazing Trader EVENT RISK Calendar:
Tue 24 Oct
Wed 25 Oct
Thu 26 Oct
14:00 US- Pending Homes Sales
Fri 27 Oct
14:00 US- final Univ of Michigan
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