Investors Await Wednesday’s FOMC Meeting

  • The FOMC meeting that concludes on Wednesday afternoon has the market’s attention, even though a 25bps rate hike is a foregone conclusion. The real focus for investors will be in the forecast for further rate hikes this year, and the updated economic forecast with inflation and GDP key items of interest in the wake of the war in Ukraine. Will the Fed forecast higher inflation and slower growth in the wake of the hostilities? We think so.  In December they forecast Core PCE to be 2.3% for year-end 2022 and GDP to grow 3.8%.

 

  • The market is expecting and pricing in seven hikes this year, but the Fed is unlikely to provide that in Wednesday’s updated Dot Plot. More likely, the Fed will move from three hikes expected at the December meeting to five hikes in 2022. That may rally the short-end as it prices in a slower hiking schedule versus market expectations. Everything, however, will be contingent on the economic and inflation outlook as we move through the year.

 

  • Right now it looks like three 25bps hikes by June then balance sheet run-off commences. An additional two or three hikes in the second half of 2022 are likely as inflation is probably not going to be showing signs of easing given the developing impact of the war on energy and food prices.

 

  • The market, however, is selling off this morning in anticipation of the FOMC rate hike with 3-year Treasuries now at 2%, and longer term Treasuries following suit (see chart below).

 

  • Treasury yields are moving higher in the face of more troubling news on the war front as Russia bombed a military base very near the Polish border that was being used to train foreigners joining the fight. It seems the flight-to-safety bid is over for the time being, absent a real dramatic change in the war posture, say an accidental hit on a NATO country, like Poland.

 

  • Away from the Fed, and the war, the key economic numbers this week will be February PPI tomorrow and retail sales on Wednesday. PPI is expected to print some more eye-popping inflation numbers while retail sales is expected to be positive, but well off the surge we saw in January. In light of the weak consumer sentiment numbers from last Friday’s University of Michigan Sentiment Survey, the retail sales report will get some attention to see if the dour mood reported by consumers is causing them to spend less. So far, depressed moods haven’t kept consumers from spending. We’ll be watching to see if that is still the case for February. We have to offer this caveat once again that the retail sales report is not inflation adjusted so any increase in sales has to be taken with a grain of salt given the surging prices of late.

 


 

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 1.84 2.07 2.18 2.34 2.64 3.10
0.50 1.82 2.05 2.12 2.23 2.49 2.98
1.00 1.82 2.01 2.09 2.18 2.40 2.86
2.00 2.00 2.03 2.10 2.28 NA
3.00 2.06 2.22 NA
4.00 2.17 NA
5.00 2.14 NA
10.00 NA

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Tags: Published: 03/14/22 by Thomas R. Fitzgerald