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Stock Market Volatility Pushes Yields Lower

Treasury yields moved lower this week in response to the global drop in equity markets.  Although U.S. stocks staged a partial comeback on Friday, they remained on track to end the week lower by 4-5%.  The volatility in worldwide markets led traders to scale back bets on the pace of additional Fed tightening in 2019.  Markets are now pricing in only 80% odds of a third rate hike during the year, whereas that third hike was fully priced in earlier this week. 

The revised odds were also the result of Thursday's lower than expected CPI data, which showed that consumer prices rose at an annual pace of 2.3% in September (vs. expectations of 2.4% and prior month readings of 2.7%).  The flip side of those modest price increases was that inflation-adjusted earnings rose by the most in six months.  It appears that employees are slowly starting to see the benefits of the robust labor market, aided by (perhaps temporary) declines in energy and used auto prices.

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