Looking for Clues

  • Treasuries are starting the week tentatively in the green as they await more Fed speak and a look at April retail sales and housing activity. With the rise in rates and, of course, inflation the market will be looking for any sign of buckling by consumers.

 

  • As far as Fed speak, there will be at least 10 officials opining on policy during the week, including Chair Powell tomorrow afternoon. With the latest inflation prints not offering any reprieve on the price front, we can expect a continuation of the hawkish rhetoric we’ve become accustomed to in recent months.

 

  • 50bps hikes are mostly baked in for June and July. Then the September meeting becomes something of a toss-up as whether they continue with another 50 or downshift to 25bps.

 

  • The April CPI report, however, gave plenty of signals that any retreat in prices will be a slow, grinding affair so we don’t foresee a shift in tone by the Fed anytime soon, but admittedly, September is a long way off.

 

  • The Fed wants to cool demand while hoping the supply side problems abate but with the recent China lockdowns over Covid it’s more likely we get another dose of supply-side price shock. And given the lagged nature of policy action affecting economic activity, investors are sensing a coming policy error by the Fed as they seem intent to continue tightening given the grudging nature of inflation. Hiking until something breaks is a phrase that keeps coming to mind.

 

  • The April releases this week for retail sales and housing activity may be a bit too early to see any material weakening but investors will be looking for any clues pointing in that direction. As for retail sales, April is expected to post decent numbers, but again they will be in nominal terms such that price increases will be inflating the results by some measure.

 

  • Housing starts and permits are expected to be down slightly from March but still near cycle highs. That report will be released Wednesday. Existing home sales are also expected lower from March but that would represent a third straight monthly decline which could indicate that higher mortgage rates and home prices are taking a bite out of activity on a consistent basis.  That report is due on Thursday.

 

  • In the meantime, the Fed will continue to talk tough on inflation and investors will be looking for any clues as to future rate hikes past July and any signs that the consumer is starting to take a step back.

Source: Bloomberg


 

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 2.58 2.81 2.94 3.11 3.41 3.87
0.50 2.57 2.79 2.88 3.00 3.27 3.76
1.00 2.56 2.75 2.84 2.96 3.18 3.63
2.00 2.74 2.79 2.88 3.06 NA
3.00 2.83 3.03 NA
4.00 2.95 NA
5.00 2.91 NA
10.00 NA

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Tags: Published: 05/16/22 by Thomas R. Fitzgerald