Investors Ponder Possible Slowing in Rate Hikes

  • 10yr Treasury yields peaked at 4.34% last Friday and then retraced during the balance of the trading day and that continued overnight with the yield dropping as low as 4.12%. Currently, the yield is 4.22%. The market continues to run a bit with the theme that the Fed is close to slowing the rate of rate increases after next week’s expected 75bps hike.

 

  • While we’re not so sure we would take that angle, the Fed has gone into its pre-meeting quiet period so there won’t be any pushback until we get past the meeting and to the Powell press conference. That means the market has some time this week to continue with the possible soft pivot narrative as a trading theme.

 

  • Buttressing that theme this morning is a plethora of PMI readings from Europe that disappointed to the downside and that feeds into the global slowdown narrative.

 

  • As for our domestic calendar, the first estimate of third quarter GDP which is expected to post a solid 2.3% gain. The Atlanta Fed’s GDPNow has it even better at 2.85%.  Current expectations for fourth quarter, however, are looking for a more dramatic slowdown to 0.6% as the rapid series of rate hikes starts to work into the economy.

 

  • The other big release this week will be the Friday Personal Income and Spending Report for September. The inflation series in that report will get the lion-share of attention. The PCE deflator is expected up 0.3% matching the gain in August and 6.3% YoY vs. 6.2% the prior month. Core PCE is expected up 0.5% vs. 0.6% in August with the YoY rate moving higher to 5.2% vs. 4.9%. Much like the CPI series, the PCE will begin to see large monthly prints from 2021 start to roll-off the YoY calculation beginning with October 2021’s 0.4%, then 0.5% in November and December. So, the YoY numbers won’t begin to show any improvement until later this year and continuing into 2023.

 

  • Also, during the week we’ll get several housing releases that will continue to reflect the slow down in that once red-hot sector, but home prices are expected to continue to show healthy gains. The S&P Core Logic CS 20-City annualized gain in home prices for August is expected to tick lower to 14.10% vs. 16.06% in July. The series peaked at 21.29% in April, so the rate hikes are having an impact, but on an historical basis, home price gains remain solid (see graph below).

   S&P Core Logic CS 20-City Annualized Home Price Appreciation

 


 

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.40 5.62 5.62 6.00 6.50 6.65
0.50 5.39 5.60 5.51 5.90 6.40 6.50
1.00 5.39 5.56 5.46 5.85 6.29 6.35
2.00 5.55 5.39 5.78 6.20 NA
3.00 5.72 6.00 NA
4.00 5.95 NA
5.00 5.90 NA
10.00 NA

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Published: 10/24/22 Author: Thomas R. Fitzgerald