PrefBlog

The FOMC tightened today:

The Federal Open Market Committee approved the following statement for release by a 12 – 0 vote:

The Committee decided to raise the target range for the federal funds rate by 1/4 percentage point to 3-3/4 to 4 percent, in support of the Federal Reserve’s dual mandate. The Committee is continuing its policy of maintaining ample reserves in the banking system.

Economic activity is expanding at a solid pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient. Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little.

Inflation remains elevated. Today’s policy action will support a timelier return to the Committee’s 2 percent goal. The Committee will deliver price stability.

… and the dot plot suggests there will be more to come … and not just for a little while:

Equities didn’t like it:

Before the Fed’s announcement, the three major U.S. stock indexes had ‌been gaining ground, ​with a chips rebound, giving the tech-heavy Nasdaq ‌the edge. Earlier in the session, robust U.S. retail sales data suggested consumers were still spending, despite an affordability squeeze due to rising ​prices, particularly at the gasoline pump.

The war in the Middle East expanded ⁠as Saudi warplanes pounded Yemen while Iran-backed Houthi fighters launched drones and missiles at Saudi cities in a signal ⁠of Iran’s extended reach in the widening conflict.

Even so, oil prices dipped after reports that Saudi Arabia was offering additional crude cargoes via Oman eased concerns about supply ​disruptions. Crude is up over 20% in the last 2-1/2 weeks. Front-month WTI settled down 3.2% and Brent crude settled down 2.7%.

The Dow Jones Industrial Average fell 631.33 points, or 1.21%, to 51,461.78, the S&P 500 lost 33.59 points, or 0.44%, to 7,552.14 and the Nasdaq Composite lost 3.15 points, or 0.01%, to 25,978.43.

The S&P/TSX Composite Index ended down 90.8 points, or ⁠0.3%, ​at 35,491.27, its lowest closing level since July 31.
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Six of the 10 major TSX sectors notched gains, led by a 1.9% advance ⁠for utilities as yields on ​long-dated bonds eased. Short-term U.S. bond yields, however, did rise following the Fed announcement and press conference, signaling a market pricing in more rate hikes ahead. Fed policy decisions having a greater immediate impact on the shorter end of the bond curve.

PerpetualDiscounts now yield 5.82%, equivalent to 7.57% interest at the standard conversion factor of 1.3x. Long corporates yielded 5.41% on 2026-09-16. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened to 215bp from the 200bp reported September 9 .

US inflation data was not encouraging:

Consumer prices rose at a 3.4% annual rate last month, the same pace as July, according to the latest Consumer Price Index from the Bureau of Labor Statistics.
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On a monthly basis, prices rose 0.4%, an acceleration from July’s 0.1% rate. Gasoline prices, up 3.9%, accounted for a third of the monthly price increase.
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But for the Fed, the most worrisome aspect of August’s inflation report is likely the evidence that inflation has spread beyond the pump. When stripping out food and energy costs, so-called core inflation rose 2.4% in the 12 months ending in August, down from 2.5% in July. On a monthly basis, core rose 0.3%.

After the release of Friday’s report, traders boosted the odds of a rate hike to 90% from 70% the day before, according to CME FedWatch. Central bank officials convene on Tuesday and Wednesday next week to determine their next move on interest rates.
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Some of the largest price increases in the August CPI report stemmed from tech. Computer software and accessory prices rose 25.4% for the 12 months ended in August, the largest annual price increase recorded. Computers and smart home assistants cost 8.4% compared to a year ago.

Meanwhile, smartphone prices were down 12.2% versus the prior year. Earlier this week, though, in addition to announcing its new line of iPhones, Apple said it was raising prices of older models by $100. The price increases are tied to surging costs of producing chips, a byproduct of the booming demand of AI.

There were also strong gains in prices of rental cars, vehicle maintenance, day care and preschool, nursing homes and in-home care.

OK, so the US PPI jumped a bit in August:

The Labor Department’s producer price index – which captures inflation before it reaches consumers – rose 5.4 per cent in August from a year ago, up from 4.8 per cent in July, the government said Thursday. Annual wholesale inflation peaked this year at 5.9 per cent in May after the Iran conflict raised energy costs. On a monthly basis, wholesale prices increased 0.4 per cent from July to August, after a 0.1-per-cent increase the previous month.

And investors were uninspired by the latest iteration of Operation Twist:

Treasury said ⁠on Wednesday ​it would buy as much as US$6 billion of debt maturing in 10 to 20 years in its next buyback operation, up from a $2 billion maximum previously. The amount was higher than the $4 billion minimum Treasury Secretary Scott Bessent outlined last month as part of an effort to improve liquidity in long-dated debt. That buyback was scheduled on Thursday.

But that was not enough ​to satisfy a market that has become increasingly concerned about the government’s capacity ‌to support longer-dated Treasuries at a time when a generally stable economy and expanding deficits are pushing yields up.

The benchmark 10-year Treasury yield rose to its highest since November 2023 after the announcement, while the 20-year yield climbed to a three-week peak, as did the 30-year yield. Yields rise when prices fall.

U.S. yields extended their rise on Thursday after producer prices increased in August, and oil prices rose above $100 per barrel.

And bond yield jumped:

U.S. Treasury yields climbed on Thursday after the latest inflation reading pushed up expectations for a Federal Reserve interest rate hike next week, while soaring oil prices exacerbated inflation worries.

Canadian bond yields largely followed along, with both five-year and 10-year government yields up about 10 basis points. The Canadian five-year – key to fixed mortgage pricing – reached 3.641% by late afternoon, its highest since mid-2024.
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The yield on benchmark U.S. 10-year notes rose 10.93 basis points to 4.946%, hitting its highest levels since October 2023.

The 30-year bond yield rose 7.27 basis points to 5.3587%, reaching its highest point since June 2007.

The 2-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, rose ⁠13.33 basis points to 4.56%, touching its highest point since July 2024.

And equities got smacked around a bit:

North American stocks ended down on Thursday after U.S. producer price data for August and surging oil prices stoked worries the Federal Reserve will hike interest rates next week, while climbing Treasury ⁠yields made ​stocks less attractive.

With supply routes through both the Strait of Hormuz and the Red Sea disrupted by the U.S.-Israeli war on Iran, Brent crude jumped 6% to US$107 a barrel, adding ​to inflation worries and fueling expectations the Fed will raise interest rates ‌at its policy meeting on Wednesday.

Yields on 10-year U.S. Treasury notes rose to their highest in nearly three years, while 30-year Treasury yields hit their highest in more than 19 years and 2-year Treasury yields reached their highest in more than two years.

Canadian bond yields rose almost as much, with both five-year and 10-year government yields up about 10 basis points. The Canadian five-year – key to fixed mortgage pricing – reached 3.641% by late afternoon, its highest since mid-2024.
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The S&P 500 declined 0.58% to end the session at 7,591.75 points.

The Nasdaq declined 0.65% to 26,081.73 points, while the Dow Jones Industrial Average declined 0.60% to 52,064.10 points.
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The S&P/TSX Composite Index ended down 400.28 points, or 1.11%, at 35,506.28. It marked the fourth straight daily decline for the index, which is the longest such streak since April, ​and the lowest closing level since ‌July 31.

PerpetualDiscounts now yield 5.67%, equivalent to 7.37% interest at the standard conversion factor of 1.3x. Long corporates yielded 5.38% on 2026-09-09. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained constant at the 200bp reported September 2 .