The S&P 500 was down 0.75 of one point as all the major indexes were flat on Wednesday. This is a continuation of the extremely low volatility we have seen this summer as the VIX was down 0.73% to 10.85. The Nasdaq was up 0.06% which was enough to extend its winning streak to 7 days which is the longest one since March. Facebook stock was up 0.75% as it continues its positive momentum following the crash after its earnings report. Snapchat announced it lost 3 million daily active users which is great news for Facebook as Instagram is eating Snapchat’s lunch. The consumer staples sector was the worst performer again as it was down 0.77%. The technology was the best as it was up 0.28%.

Treasuries Rally

The 10-year bond continued to defy Jamie Dimon’s call for 5% rates as it fell one basis point to 2.95%. There should be volatility in the bond market on Friday when the CPI report comes out. It makes sense that there hasn’t been much action this week because not much important economic data has come out and earnings season has slowed to a trickle. The 2-year yield was flat at 2.67% which means the difference between the 2 bonds is 28 basis points.

Latest Action In The Fed Funds Futures Market

As you can see from the chart below, there is a 70.6% chance the Fed hikes rates at least 2 more times this year. The market doesn’t react to rate hikes. It reacts to changes in the Fed funds futures market. The rate hike in September isn’t going to flatten the curve because there is already a 96% chance of a hike. If there is another hike in December, the 2-year yield should increase if the chance stays at this rate. However, it’s more likely that the probability either goes very close to zero or near 100% like in September. The Fed has been very clear with its policy stance in the past few years. As the probability continues to increase, the 2-year yield should increase, flattening the curve. Next, we’ll look at the chances for 2019 hikes, which should bring the curve to an inversion if the 10-year yield doesn’t get above 3%.