Stocks Treading Water, Treasury Yields Higher Ahead of Fed Policy Decision

The major U.S. equity indexes are treading water at the mid-session on Thursday, shortly before the release of the U.S. Federal Reserve’s interest rate and monetary policy decisions at 1900 GMT.

The central bank is widely expected to keep rates unchanged, but investors will look at the monetary policy statement for clues as to the pace of the Fed’s future moves on interest rate. The central bank is expected to issue a hawkish statement that will strongly indicate another rate hike in December. However, investors want to know if recent stock market volatility has persuaded Federal Open Market Committee members to back off slightly from the three rate hikes in 2019 they suggested in their September statement.

We don’t expect any major changes to policy, but the FOMC may decide to tweak its policy by announcing it will move to increase the rate paid by the Fed for excess reserves. This is to encourage member banks to pull money out of the system, which is another form of tightening.

 Treasury Markets

U.S. Treasury yields are edging higher Thursday a couple of hours ahead of the Fed’s decision on monetary policy. The early price action supports the notion that investors are expecting a hawkish tone from the Fed. This should help extend the uptrend in Treasury yields.

Hinting that it would consider reducing the number of rate hikes in 2019 would be dovish. This would drive T-note and T-bond prices higher, while lower yields.

As far as the election outcome is concerned, Treasury traders felt the as-expected results were not likely to cause any major fluctuations in the credit markets. They went on to say that with the Democrats winning the House and the Republicans retaining control of the Senate, Congress could stall plans for further tax cuts or major spending. This could help support bond prices which have been pressured by historic deficit spending and debt issuance from the Treasury Department.

Economic News

There was only one major report on Thursday, Weekly Unemployment Claims. According to the Labor Department, the number of Americans filing for state unemployment benefits slipped in the week-ending November 3. The report showed first-time claims for state unemployment benefits totaled 214,000 last week, matching economists’ expectations.

Natural Gas

December Natural Gas futures are trading slightly lower at the mid-session shortly after the release of the latest U.S. Energy Information Administration’s weekly storage report. According to the EIA, domestic supplies of natural gas rose by 65 billion cubic feet for the week-ended November 2. Analysts were looking for an injection of 56 billion cubic feet.

Prices fell on the news, but are clawing back earlier losses due to a forecast calling for cold temperatures in key demand areas between November 17 and November 22.