Market Awaits FOMC Rate Decision and Powell’s Comments

  • Treasury yields are modestly higher this morning, but the moves lack conviction given the upcoming FOMC meeting with the expected 75bps rate hike. The 10yr Treasury is off 7/32nds in price to yield 4.04% as the 4% level remains a target.

 

  • The big talk around the Fed meeting is whether Fed Chair Powell is going to signal a reduction in the size of future rate hikes, but perhaps tied with a higher terminal rate with a longer time frame at that rate. The other option is for Powell to remain adamantly hawkish with little give on that front, at least for this meeting.

 

  • Keep in mind this week’s meeting doesn’t have updated rate or economic guidance while the December meeting will. Also, the December meeting will come after two more CPI and jobs reports, so the Fed will have a much better idea how the direction of inflation and the labor market is trending. That’s why we see it likely that Powell won’t signal too much change in the magnitude or cadence at this meeting with so much data to come before the December meeting.

 

  • In addition to the Wednesday FOMC rate decision, the week is chock full of fundamental data headlined by the October employment report on Friday. Expectations are for an increase of 190 thousand jobs with the unemployment rate ticking up to 3.6% from 3.5%. The 190 thousand new jobs would be the lowest since a negative print back in December 2020. Still, that pace would have been solid in a pre-pandemic world, so it won’t alter the Fed’s current rate-hiking calculus. Plus, keep in mind this report comes after the Wednesday Fed meeting, so this will be data that gets folded into the December rate decision.

 

  • In addition to the jobs report, the pair of October ISM reports will be released this week. The ISM Manufacturing is due tomorrow with a reading right on the dividing line of contraction and expansion of 50 expected. The ISM Services is due on Thursday with a reading of 55.1 vs. 56.7 in September.  If the reports come as expected, they will follow the trend of the past several months with more softening in the manufacturing sector, approaching contraction status, while the services sector is softening a bit, but from a higher level and with a healthy margin still above 50 (see graph below).

 

  • The September JOLTS report is due tomorrow, and the job openings number is expected to dip from 10 million in August to 9.6 million. That will add conformation that the employment market is slowing but from a position of strength with plenty of momentum still needing to be drained from the market.

 


ISM Manufacturing and Services Indices 

 


 

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.31 5.32 5.30 5.33 5.39 5.85
0.50 5.30 5.29 5.24 5.22 5.25 5.74
1.00 5.29 5.26 5.21 5.18 5.16 5.61
2.00 5.25 5.15 5.10 5.04 NA
3.00 5.05 4.98 NA
4.00 4.93 NA
5.00 4.89 NA
10.00 NA

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Published: 10/31/22 Author: Thomas R. Fitzgerald