- Treasury yields are higher this morning as investors rethink the Friday afternoon rally that sent the 10yr from a post-jobs report high of 3.63% to a low of 3.47%.?Some signals from China of easing covid restrictions are putting pressure on Treasuries on the belief that a more lenient Chinese government will allow more economic activity but also more inflationary pressure as well. Presently, the 10yr is yielding 3.55%, off 18/32nds in price while the 2yr is yielding 4.32%, off 2/32nds in price. The 2yr – 10yr inversion hit a new cycle low of -81bps earlier this morning but is presently at -77bps due to the selling mentioned above.
- After last week’s full slate of data and Fed speak, this week will be much more sedate. The Fed has gone into its pre-meeting radio silence and the data calendar is sparse, and decidedly second tier in nature, so the market will drift around on other global news (see China above) and opinions on how able Powell and Company will be in sticking with a higher-for-longer rate policy in 2023.
- The Fed is trying to get investors to believe they will move to a terminal level early next year and keep it there for the balance of 2023. The market is a little more circumspect that when growth slows in 2023 and unemployment starts to climb above 4% that the Fed’s resolve to hold pat will be tested.
- That’s why you see fed funds futures currently peaking just under 5% by mid-2023, followed by approximately 50bps in rate cuts by year-end. The Fed has pushed back against this outlook in numerous speeches by various members, but the market so far hasn’t bought the rhetoric.
- While a 50bps hike is a given at next week’s meeting, we think the Fed will more importantly try to use it to push back against the market’s 2023 outlook. Through updated dot plots, economic forecasts, the statement, and the post-meeting press conference they will probably provide a unified message that they are serious about getting to a terminal rate and keeping it there through 2023. The question will be whether investors will finally be convinced. If so, longer maturity Treasuries will be due for a correction, but if doubts persist the period of lower long end yields will continue.
- One data point that will get some attention this week will be Friday’s November PPI. It’ll be the first set of November inflation data before next week’s more impactful CPI series. In any event, expectations are for continued moderation in producer prices with the monthly rate mirroring the October increase of 0.2% and the YoY dropping from 8.0% to 7.2%. Ex-food and energy the monthly series is expected tick higher with a 0.2% gain versus 0.0% in October, and the YoY rate dipping to 5.9% from 6.7%. So, further improvement in producer prices is expected but with YoY levels still uncomfortably high don’t expect much change in Fed rhetoric off the report.
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Published: 12/05/22 Author:? Thomas R. Fitzgerald
