A few weeks ago, I argued that the real enemy of the market was the geopolitical crude oil wrecking ball and not the potential government shutdown. History suggests that markets usually shrug shutdowns off, as they come and go and, in turn, are always classified as non-events by investors. It was not any different this time around. In a stunning and surprising turnabout, Congress approved a last minute plan to keep the government running through mid-November to alleviate this deeply unpopular insanity. Although the centrists and the moderates were marginalized by the belligerent extremes of their parties, the predicament was not the real deal. Yes, the market could have missed important data prints as a consequence, but the most important and preferred inflation gauge, upon which the Fed relies on the most to make policy decisions, was released on Friday on time. The PCE price index, excluding food and energy, increased 0.1%, below consensus, registering a y/y increase of 3.9% with a 3- month annual rate of 2.2%, not far from the Fed’s 2.0% inflation target. The swap market is now pricing in a 67% chance of no further rate hikes this year while the New Fed staff Nowcast for real GDP stands at 2.1% for Q3 and 2.0% for Q4.
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By Hubert Marleau