Monthly chart of US 2-year Treasury yields (%)
This is one of the key charts to watch in the markets right now. The yield on the 2-year note remains elevated near the 3.55% level but bond investors will have to wait for confirmation from the Federal Reserve tomorrow. Additionally, the yield on the 10-year note is expected to be around 3.62%, which is its lowest level this year.
In the forex market, the USD/JPY pair also came close to breaking the 140.00 level on the daily chart yesterday, but this level held at the close. The pair has now returned to around 140.55 but the sellers are still in control and the pressure is on. Especially with yields remaining heavy.
So, what does it say about market expectations ahead of tomorrow’s Fed meeting?
There is a tendency, or at least a feeling, that traders are trying to force the Fed to make a decision again. It wouldn’t be the first time, and given the Fed’s lack of courage, it won’t be the last. The question now is, will the Fed give in and continue with a 50bp cut? Or will it stick to its guns and make a 25bp move?
I was pretty sure of the latter option last week, but now I’m pretty sympathetic to the former idea as well. The market pricing for that option has jumped higher in the past day to about 69% now. There’s room for frustration and now the question is whether the Fed is willing to upset traders like that.
On the other hand, a 50bp rate cut would mean they have unwinded everything they have been trying to sell since Jackson Hole. That would be a blow to credibility, as it could signal some sort of “panic.” Even if it isn’t, traders could still interpret it as a fear that things could be worse than the data suggests. That would mean more “panic.”
So, that’s a potential risk if they give in and decide to cut rates by 50 basis points tomorrow. If the Fed didn’t have a history of being pressured into making decisions, it would have been a pretty surefire move of 25 basis points. But unfortunately, we all know that its track record has been blemished in the past. If you fool me once, shame on you. If you fool me twice, shame on me..