One Final Fed Hike This Year? Julius Baer Reportedly Sees December Move As Treasury Yields Hover Near 24-Year Highs

According to Barron’s, Julius Baer’s Kohl said financial conditions have tightened since the Fed's September meeting mainly through higher long-term yields and dollar strength, not the rate increase itself.

• Slower job growth and fewer industries posting employment gains make December the most likely timing for the next rate, according to Julius Baer.
• The 10-year Treasury yield retreated toward 5.27%, while the 30-year eased to around 5.64%.
• Brent crude slips below $100 a barrel as oil prices decline alongside Treasury yields.

Julius Baer reportedly expects the Federal Reserve to raise interest rates one more time this year, with December the most likely opportunity after the U.S. labor market cooled slightly in September.

Julius Baer Chief Economist David Kohl expects one final 25-basis-point increase in followed by an extended pause, Barron’s reported Tuesday, citing Dow Jones Newswires. Slower job growth and employment gains across fewer industries make December the most likely timing for the next move, Kohl wrote.

Financial conditions have also tightened since the Fed’s September meeting, he said, mainly because of higher long-term yields and dollar strength rather than higher short-term rates. The offset from higher equity markets has moderated.

Treasury Yields Retreat From Recent Highs

Long-term Treasury yields pulled back Tuesday as oil prices also declined, with Brent crude slipping below $100 per barrel. The 10-year yield eased toward 5.27%, while the 30-year was around 5.64%. 

Despite the retreat, the Long-term Treasury yields continue to hover near 24-year highs. According to Reuters, markets have sharply reduced expectations for an October Fed hike following weaker jobs data

Ray Dalio Flags Foreign Demand Risk

The pullback in yields comes as Bridgewater Associates founder Ray Dalio warned that U.S. Treasuries remain vulnerable to weaker demand from China and Japan.

Dalio told Bloomberg Television that the U.S. relies on foreign capital for roughly one-third of its debt and said geopolitical and economic considerations could make China less willing to keep accumulating U.S. debt. 

The investor said Japan may want to bring back capital it has lent abroad. Dalio reiterated his warning that the U.S. could face a debt crisis within three years, adding another longer-term risk to a Treasury market already contending with elevated yields and heavy government borrowing. 

What To Watch Next

Last week, Fed Vice Chair Philip Jefferson and New York Fed President John Williams said they would rather see more data before considering further action, prompting traders to slash bets on a hike at the Fed's October meeting.

The Fed’s next policy meeting is scheduled for Oct. 27-28, giving investors another opportunity to assess whether policymakers are moving toward the December-hike scenario. 

How Is the U.S. Stock Market Placed Today?

U.S. stock futures were higher early Tuesday following a record-setting session for tech equities. At the time of this writing, Dow futures rose 0.5%, while Nasdaq, S&P 500 and Russell 2000 futures rose up to 0.5%.

On Stocktwits, retail sentiment for the SPDR S&P 500 ETF (SPY), an exchange-traded fund that tracks the S&P 500 Index, has moved to ‘extremely bullish’ from bullish, and Invesco QQQ Trust (QQQ), which tracks the Nasdaq-100 Index, has stayed ‘extremely bullish’ since last week. 

Sentiment around the SPDR Dow Jones Industrial Average ETF (DIA), which tracks the Dow Jones Industrial Average index, remained ‘extremely bullish '.

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