• Treasuries are well bid this morning after reacting negatively to Fed Chair Powell’s Cato conference comments yesterday that didn’t retreat from any of the hawkishness of Jackson Hole. Treated negatively yesterday, this morning the Treasury rally is being explained as “investors feeling rate hikes are getting close to being fully priced in.” Go figure.


  • While that could certainly be true, there is a bunch of data and events coming in the next week or so that could upset that line of thinking.


  • First, we have the August CPI report due next Tuesday, and while another coolish report like July’s is expected (overall -0.1% expected vs. 0.0% in July and core 0.3% matching July’s) a surprise is always possible. Next, we have the FOMC meeting on September 21 that will offer up a likely 75bps hike, but also deliver new dot plots on future rates and economic forecasts. Could all the consistently tough talk from the Fed be an attempt to prepare markets for a higher terminal rate forecast than the 3.75% -4.00% the market expects? Just a thought.


  • The final bit of Fed speak before the meeting happens today with three officials talking on the economy and careers in economics. We continue to expect little nuance, especially as they get the last word, and as we’ve mentioned before, the playbook seems to be don’t give any impression that a dovish pivot is coming.


  • Meanwhile, the global tightening plan continues. As we speculated on Wednesday the ECB hiked their overnight rate by 75bps yesterday, moving it from 0% to 0.75%. They meet again in October and another 75bps hike is already expected as the ECB plays catch-up to the Fed and other central banks.


  • While all these rate hikes, and those to come, are an attempt to beat back inflationary pressures, it struck us as we prepared an economic presentation for an upcoming bond school how many expense categories have already experienced significant price declines. From energy to shipping rates to wheat and used car prices, the thought of peak inflation being behind us certainly seems to be the case. Owners Equivalent Rent remains the one big exception, and with a nearly 25% weight on CPI until it starts to recede big improvements in the inflation numbers will be limited. But with housing activity well into the doldrums some improvement in OER should be coming down the road. Thus, the trend in inflation looks positive and that is something the Fed may not be admitting in public, but they are no doubt seeing early signs of it in the data.


West Coast Shipping Rates


Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 3.51 3.60 3.61 3.68 3.83 4.29
0.50 3.50 3.57 3.55 3.56 3.68 4.18
1.00 3.49 3.54 3.52 3.52 3.59 4.05
2.00 3.53 3.46 3.44 3.48 NA
3.00 3.39 3.41 NA
4.00 3.37 NA
5.00 3.33 NA
10.00 NA

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Published: 09/09/22 Author: Thomas R. Fitzgerald