Investors Betting on Soft Inflation and Wage Numbers

  • Treasuries are under a bit of pressure this morning as former New York Fed President Bill Dudley has basically told the market don’t fight the Fed. He speaks of the differing outlook in 2023 where investors expect a sub 5% terminal rate with 50bps of rate cuts before year end while the Fed’s latest forecast has a terminal at 5.00% -5.25% and no cuts until 2024. So the jawboning of the market by the Fed, or former members, continues.


  • With Christmas fast approaching, the calendar is packed this week with releases. In reality, however, the tone has already been set with the Fed meeting last week, and the latest CPI report. One release that will get some attention will be Friday’s Personal Income and Spending numbers for November. Investors will be looking for another softish inflation read when the PCE numbers are released. With investors betting on a shorter road to rate cuts, a string of soft inflation reports will have to happen to make the rate cut calls in 2023 more plausible.  So, expect some volatility off those numbers in what is likely to be lightly staffed trading desks.


  • In the meantime, as exhibited by Dudley today, don’t expect any relent from Fed officials in their rhetoric. They want to keep financial conditions tight and any hint of a dovish shift will only feed into stock and bond rallies undoing some of the tightening they have been working on. In essence, the beatings will continue until morale improves.


  • Probably the next big report that will have the ability to move the Fed is the January 6 jobs report for December. Wage growth will be the lead number in the report as the Fed looks to see some softening in wage gains lest it spur a wage price spiral. YoY wage growth has been running just over 5% and the Fed will want to see that somewhere closer to the 4.2% long-run average or below.


  • Thus, while improvement on inflation is clearly evident, the Fed’s rhetoric has shifted a bit from a focus on the inflation battle to more discussion of the wage question and the tight labor market. Expect the December jobs report to set the tone for any evolution of that discussion as Fed members prepare for the February 1 FOMC rate decision. A still hot wage number could call for another 50bps hike vs. thoughts of only 25bps.


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.07 4.83 4.74 4.72 4.79 5.25
0.50 5.05 4.80 4.68 4.60 4.65 5.14
1.00 5.05 4.77 4.65 4.56 4.56 5.01
2.00 4.75 4.59 4.48 4.44 NA
3.00 4.44 4.38 NA
4.00 4.33 NA
5.00 4.30 NA
10.00 NA

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Published: 12/19/22 Author: Thomas R. Fitzgerald