The US equity market was unable to sustain early gains yesterday and, although several Asian markets posted minor gains, Europe is seeing red again today. US equities are called lower as well. The European bond market rally continues, except for Greece, where the 10-year yield has risen about 70 bp over the past five sessions.
The EU seems to be resisting a early Greek exit from its aid program.  Its stance threatens to cut off one of the legs of Prime Minister Samaras’s political strategies to avoid going to the polls next year, in which Syriza could win.  Â
Meanwhile, the continued decline in oil prices, and the knock on effects on inflation expectations continues to weigh on sentiment. Breakevens (difference in yields between the inflation linked bonds and conventional bonds) continue to slide. In the US, the 5 and 10-year breakevens are about 1.51% and 1.92% respectfully. These are the lowest reading since October/November 2011. The US 10-year yield is hovering around 2.20%.Â
The hawkish bias of the dot-plot released at last month’s FOMC meeting has been completely unwound. Â The gap between what the market is pricing the Fed to do next year and what the FOMC dot-plot says has gotten wider. The market has pushed the expectations further out. Â The December 2015 Fed funds futures contract now implies less a 50 bp effective Fed funds rate. Â Just like the tapering began several months after the market had initially expected it, so too with the rate hike, the next important step in normalizing monetary policy. Â
Previously, we highlighted how the Federal Reserve is organizationally different from the ECB. The Fed’s Board of Governors are where policy is set.  Regional presidents can influence the course, but are a minority, especially given that the NY Fed is often more aligned with the Board. They are also different when it comes to the economic impact of a significant change in oil prices. Â
