BANK OF AMERICA WARNS FED COULD DELIVER 50BPS HIKE IN DECEMBER

Bank of America has warned that the Federal Reserve could deliver a 50-basis-point rate hike in December, a move substantially larger than the 25-basis-point increments the central bank has typically favored. The transmission mechanism runs through the front end of the Treasury curve: a larger-than-expected hike would widen the rate differential against expectations already priced into fed funds futures, pushing short-term yields higher and flattening the yield curve further. Bank of America (BAC) is directly exposed through its net interest margin, since a steeper repricing of short-term funding costs can compress spreads on deposits and loans, while higher rates also raise the risk of credit stress in its consumer and commercial loan books. Traders should watch the November Consumer Price Index release, which will heavily influence whether the Fed's December decision is calibrated toward 50 basis points or a more conventional 25.

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