Investors Await Busy Week

  • Treasury yields are lower this morning as the market braces for a heavy load of new information headlined by tomorrow’s November CPI reading and Wednesday’s FOMC Meeting. The 10yr is currently yielding 3.53%, up 14/32nds in price while the 2yr is yielding 4.33%, up 1/32nds in price.


  • With the holidays fast approaching, investors would be excused for some inattention to the market, but this week brings the last hurrah for 2022 with November CPI tomorrow, FOMC on Wednesday, two other central bank meetings this week, and a pair of Treasury auctions today. So, some focus this week seems necessary before worrying about holiday shopping lists takes precedence.


  • While Wednesday’s FOMC rate decision will be the headline event, the November CPI is likely to set the tone in trading for the balance of the year.  Both headline and core are expected to increase 0.3% MoM, with the overall YoY rate declining to 7.3% from 7.7% and core dipping to 6.1% vs. 6.3% in October. With goods prices on a definite downswing, and with oil prices continuing to decline, the focus will be on the services side. With current market rents heading lower the impact of owners equivalent rent, while lagging, will be less important while other service categories will get a thorough examination to determine the breadth and stickiness of services-side inflation.


  • Whatever the CPI result, it’s not likely to alter the Fed’s actions on Wednesday. A 50bps rate hike is baked in with the real question being how much will the Fed push back on the market’s reluctance to embrace the higher-for-longer mantra. With updated dot plots, economic forecasts, and of course the press conference this will be a prime opportunity for the Fed to reiterate once again they are serious about holding rates at or near terminal through 2023.


  • The market still sees rates peaking just under 5% early next year and then rates cut by nearly 50bps before year end 2023 (see graph below). Between all the new information the Fed will present on Wednesday it’s likely they will push their higher-for-longer theme across all those pieces of data. In the September forecast they had rates declining by 75bps in from 2023 to 2024 so it seems logical we will so both higher levels of terminal (call it 5% – 5.25%) and less out-year rate cuts. Of course, Powell will have the opportunity to explain all of this in further detail at the post-meeting press conference. It promises to be well attended.


  • Before all the festivities of CPI and FOMC we get a pair of Treasury auctions today with the 3yr and 10yr on offer. Recent 3yr auctions have gone off well while recent 10yr auctions have sold at slightly lower prices to market. With the early rally this morning that may be the case again. Another item of note, while foreign sponsorship has been off this year, given the pronounced strength of the dollar, as the Fed approaches its terminal rate, dollar strength should plateau, if not weaken, and foreign buying interest should increase. That foreign interest will be a 2023 story but one that is likely to be supportive of Treasury prices next year.


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.18 4.97 4.87 4.83 4.86 5.32
0.50 5.17 4.94 4.81 4.72 4.72 5.21
1.00 5.16 4.91 4.78 4.67 4.63 5.08
2.00 4.90 4.72 4.60 4.51 NA
3.00 4.55 4.45 NA
4.00 4.40 NA
5.00 4.37 NA
10.00 NA

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Published: 12/12/22 Author: Thomas R. Fitzgerald