Treasury Yields Drift Higher Ahead of Jackson Hole

 

  • Treasury yields are drifting higher this morning, but the moves are in range which is not surprising with Fed Chair Powell’s Jackson Hole appearance approaching this Friday.

 

  • The 10yr Treasury yield is back above 3.00% and is currently at 3.09% while the 2yr-10yr spread is -27bps. This drift is likely to persist until we get past the Jackson Hole event on Friday morning.

 

  • Speaking of Jackson Hole and Powell’s keynote address, the consensus is that he will continue the hawkish tone that has been prevalent since the July FOMC meeting. Yesterday, Minneapolis Fed President Neel Kashkari continued the chorus by saying that “it’s very clear we have to tighten monetary policy. When inflation is 8% or 9%, we run the risk of un-anchoring inflation expectations, leading to very bad outcomes.” We suspect this is a set-up for the type of speech we’ll hear on Friday.

 

  • St. Louis Fed President Bullard has mentioned wanting to get to 4.0% as quickly as possible and while we aren’t likely to hear that kind of transparency from Powell on Friday, it does seem more officials are leaning towards getting to that level of 3.75% to 4.0% and then sit back and see how inflation behaves.

 

  • All that rhetoric aside, it does look like the impact from prior rate hikes is starting to be reflected in economic numbers. The housing market is well into a slowdown at this point as sales activity slows to multi-year lows. This morning, durable goods orders for July were a mixed bag. Overall orders were flat on the month vs. 0.8% expected. That miss, however, was concentrated in the transportation sector as orders ex-transports were up 0.3% vs. 0.2% expected and matching the prior month’s gain. Orders and shipments ex air and nondefense also beat expectations but tailed a bit from June. So, some slowing in activity was noted in July but it’s not dramatic at this point. Reflecting on Kashkari’s comments, some slowing in activity is exactly what the Fed is wanting to see and no doubt more of it.

 

  • As for what the Fed does at the September meeting (50bps vs. 75bps) that decision is more likely to come after the August jobs and CPI reports early next month. While those two reports will be a focus, with the market pricing in high odds of a 75bps hike, the Fed is likely to oblige unless either report shows real softening and that is not expected at this point.

 

  • While we wait until September for the next CPI numbers, we do get the Fed’s preferred inflation measures on Friday with the Personal Income and Spending numbers for July which contain the PCE inflation series. Overall PCE is expected to be flat vs. a 1.0% gain in June. That is expected to move the YoY down to 6.4% vs. 6.8%. Core PCE is expected to increase 0.2% vs. 0.6% in June. That will move the YoY to 4.7% vs, 4.8% the prior month. So, a more grudging improvement in core and one that will not stop the Fed from reaching for a 3.75% to 4.0% terminal rate in fed funds.

 

  • While the inflation numbers will get most of the attention from the personal income and spending report, those numbers warrant a look too. Incomes are expected to grow 0.6% for the month, matching the gain in June. Spending numbers are expected to slow to 0.5% vs. 1.1% in June. Adjusted for inflation, real spending is expected to increase 0.4% vs. 0.1% in June. That gain, however, reflects more a drop in inflation in July than a pick-up in spending, but more slowing in consumption is what the Fed is after.

 

Source: Bloomberg


 

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 3.38 3.45 3.45 3.51 3.63 4.09
0.50 3.36 3.42 3.39 3.40 3.49 3.98
1.00 3.36 3.39 3.36 3.35 3.40 3.85
2.00 3.38 3.30 3.28 3.28 NA
3.00 3.23 3.22 NA
4.00 3.17 NA
5.00 3.13 NA
10.00 NA

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Tags: Published: 08/24/22 by Thomas R. Fitzgerald