Coincident with the US$ weakness, rise in bond yields, increase in inflation expectations in the TIPS and relentless rally in stocks, the fed funds futures are moving closer to pricing in a 100% chance of a Fed rate hike of 25 bps by January. Looking at the Feb fed funds futures contract, odds right now are at 86%, up from 80% yesterday, 70% one week ago and 60% two weeks ago. While the Fed has repeated that rates will stay low for an extended period, IF the recovery takes hold in Q3 and Q4 as many are betting on, the Fed will feel enormous pressure to start altering policy. An aside, one thing of interest in today’s market trading, if things close as we are now, is for the first time in a while, there is a disconnect between the action in the US$ and US Treasuries with that of stocks, as all are down. Granted it’s one day only but at some point stocks may lose their inverse correlation if the US$ breaks further to the downside.
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