Events in this Cycle Have Happened Fast

  • With no economic releases today, and no planned Fed appearances, it could be a quiet start to the weekend. Let’s hope. For now, Treasuries are sliding from unchanged to down slightly in price with a rebound in stocks indicated. Whether stocks can hold those opening gains into the close will be another matter altogether.

 

  • The 10yr Treasury yield currently stands at 2.85% after trading as low as 2.77% yesterday morning. The yield briefly touched 3.00% on Wednesday but that brought out the dip buyers. It looks like a range between 275% and 3.00% is in store for the immediate future.

 

  • The Treasury did sell 10yr TIP securities yesterday and the bidding was not inspired. It seems investors are buying the Fed’s story of hiking until inflation pressures return to near normal and as such the need for inflation protection is not so dear. The graph below tracks the TIPS inflation breakeven rates for the 2yr, 5yr, and 10yr. Notice the decline in those inflation expectations in recent weeks. It’s another sign that investors are believing the Fed’s tough talk about inflation. That may be good news for inflation expectations but what about the economy in general?

 

  • Most of the releases this week, which have been concentrated in the housing sector, have been weaker than expected. In fact, the Citigroup Surprise Index (a measure of whether a release beats or misses expectations) was at the lowest level since January, indicating an increasing amount of misses vs. expectations.  What’s notable, however, is that the index hit a high in late April.

 

  • That seems to be a feature of this cycle in that the speed in which things transpire is much faster than in cycles past. Going from peak beats vs. expectations to multi-month lows in a few weeks seems to fit the pattern, especially with the hawkish Fed rhetoric droning in the background.

 

  • Even the Fed’s thinking has gone pretty quickly from expecting a soft landing, to a softish landing, to a bumpy landing. While the Fed speak initially was that the consumer and the economy had enough momentum to prevent a slide into recession, the rhetoric now is more that even if a recession happens, inflation must be brought to heel (i.e., rate hikes will continue).

 

  • A good example of the turn in activity is with housing. It was the one sector that had been the darling of the economy ever since the lockdowns started. This week, however, every housing-related release from starts and permits, to existing sales disappointed. Next week, we will get new home sales on Tuesday and that too is expected to be down vs. March. Admittedly, the declines aren’t severe but if April comes as expected it will be the fourth straight month of declining month-over-month activity.

 

  • The point of all this is that while the Fed may think they have the time to methodically build in multiple 50bps rate hikes, the consumer and the economy may be correcting faster than they are anticipating and that could short-circuit some of those planned hikes.

 

TIPS Inflation Breakeven Rates

Source: Bloomberg


 

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 2.63 2.85 2.97 3.14 3.38 3.84
0.50 2.63 2.83 2.91 3.03 3.24 3.72
1.00 2.62 2.79 2.88 2.99 3.15 3.60
2.00 2.78 2.82 2.91 3.03 NA
3.00 2.86 2.97 NA
4.00 2.92 NA
5.00 2.88 NA
10.00 NA

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Tags: Published: 05/20/22 by Thomas R. Fitzgerald