Fed rate-hike odds approach 100% in anticipation of Trumpenomics

[SINGAPORE] Analysts spent early November warning a Trump victory in the US presidential election would make the Federal Reserve less likely to raise interest rates. What happened instead is that it made a December increase almost a certainty.

Traders assign about a 94 per cent probability, the highest level this year, to a Fed move at its final meeting for the year on Dec 13-14, futures contracts indicate. Mr Trump's spending plans are driving speculation the Fed will pick up its pace of rate increases as inflation expectations climb.

"It's hard not to think this is incredibly reflationary for the global economy," said Mark Nash, the head of global bonds in London at Old Mutual Global Investors, which oversees about about US$37 billion.

"We believe there should be more hikes priced in and bond yields should rise," he said Tuesday in an interview on Bloomberg Television.

Benchmark 10-year note yields were little changed at 2.21 per cent as of 12:01pm in Tokyo, according to Bloomberg Bond Trader data. The price of the 2 per cent security due in Nov 2026 was 98 5/32. The next target for 10-year yields is 2.5 per cent, Mr Nash said.

The odds of a Fed move have climbed from 68 per cent at the start of the month as inflation expectations surged.

Mr Trump's election helped drive a bond-market rout that has pushed Bank of America Corp's Global Broad Market Index down 1.5 per cent in November, heading for the biggest monthly decline since May 2013.

A gauge of expectations for US consumer prices this week climbed to the highest level since April 2015. The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities rose as high as 1.97 percentage points on Monday.

Fed's Measure

The inflation measure used by the Fed, the price index for personal consumption expenditures, was at a year-on-year rate of 1.2 per cent in September. The central bank's target is 2 per cent.

Prices for goods imported into the US fell in October from a year before, government data showed Tuesday. The producer price index rose 1.2 per cent from 12 months earlier, which would be the fastest pace in almost two years, based on a Bloomberg survey of economists before the report Wednesday.

"The outlook for US growth is probably a bit firmer for both 2017 and beyond," said Su-Lin Ong, an economic and fixed-income strategist at Royal Bank of Canada in Sydney.

"Markets have then stepped up to pretty much fully pricing a December move, although we do need to see greater clarity from Trump and his new administration."

BLOOMBERG