NatGas Bulls Rejoice: Colder Winter Lower 48 Forecasts May "Place Upward Pressure" On Prices

The manager turned first to a review of developments in financial markets. Nominal Treasury yields declined notably over the period, driven by weaker-than-expected data releases—especially the July employment report in early August—and policy communications that were seen as affirming expectations that a reduction in policy restraint would begin at this meeting. The decline in nominal yields over the period was primarily attributable to lower expected real yields, but measures of inflation compensation declined as well. Broad equity prices finished the period modestly higher, while credit spreads had come off the very tight levels seen earlier this year but were still narrow by historical standards. Overall, risky asset prices were compatible with continued economic expansion. The manager also discussed the brief episode of elevated market volatility in early August. That episode saw some large moves in U.S. and foreign equity indexes, equity-implied volatilities, the dollar–yen exchange rate, and Treasury yields. These sharp moves appeared to be the result of a rapid unwinding of some speculative trading positions induced by unrelated events—such as the unexpectedly inflation-focused communications from the Bank of Japan (BOJ) in late July and the weaker-than-expected U.S. employment report in early August—and amplified by technical and liquidity factors. All told, the unwinding process was contained, and market functioning recovered relatively quickly. Turning to policy expectations, the manager noted that the market-implied policy rate path shifted down materially. At the time of the September meeting, the modal path for the federal funds rate implied by options prices was consistent wit post: *FED: 'SOME' OFFICIALS WOULD HAVE PREFERRED QUARTER-POINT CUT *FED: 'SUBSTANTIAL MAJORITY' BACKED HALF-POINT RATE CUT post: FED MINUTES: ALMOST ALL PARTICIPANTS AGREED UPSIDE RISKS TO INFLATION HAD DIMINISHED. post: FED MINUTES: SEVERAL DISCUSSED IMPORTANCE OF COMMUNICATING QUANTITATIVE TIGHTENING COULD CONTINUE FOR 'SOME TIME' EVEN AS RATES ARE REDUCED