Signs of Economic Slowing are Beginning to Show

  • Treasury prices continue to move higher this morning as tech giants Google and Microsoft posted disappointing earnings after yesterday’s close, feeding the narrative that the Fed’s rate hikes are beginning to have an impact on businesses. So, we seemed to have moved into the “bad news is good news” phase of the market.


  • The earnings news was only the latest to flag a possible slowing as yesterday’s economic releases all had ominous tones in some of the data. The S&P Case Shiller Home Price Index posted a YoY dip from 15.6% to 13.0% as the July to August monthly drop of 1.1% was the largest ever for the index. Every city in the 20-city index posted price declines in August with some west coast cities posting significant dips led by Seattle where prices dropped 3.87%.


  • The Conference Board’s latest read on consumer confidence disappointed as well with all the metrics falling from August and the jobs plentiful minus jobs hard to get print took a noticeable dip as seen in the graph below. As shown, once the dip takes place it holds for quite some time. Will that trend appear this time as well? It certainly seems so with the Fed still intent on hiking in November and December.


  • So, all these markers are beginning to flag an economy that is starting to feel the impact of higher rates, and with the lag in rate hikes to actual economic impact estimated at six to nine months more slowing seems to be on tap. That realization is having an impact on Treasury prices, at least for now, as investors ponder a Fed getting closer to a terminal rate.


  • With the FOMC meeting next week it could be too that the market is expecting some softening in rhetoric from Chair Powell given the latest economic releases, but we doubt that will happen. Powell and company want tight financial conditions to persist at least until they reach their terminal rate in December or early next year. If anything, Powell may want to temper some of the equity gains of late with continued hawkish talk.


  • Buttressing that continued hawkish tone will be the sticky inflation numbers of late. Remember, that is what the Fed is attempting to curb. The September Personal Income and Spending report will be released Friday and the PCE inflation series is not expected to show any improvement. Both the core and overall YoY rates are expected to tick up as low monthly prints from 2021 roll off the calculations. This will reverse over the next several months, but for now it gives Powell some talking points to defend the current hawkish stance.

   Conference Board: Jobs Plentiful Minus Jobs Hard to Get



Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.05 5.50 5.52 5.60 6.50 6.60
0.50 5.03 5.38 5.41 5.50 6.40 6.45
1.00 5.03 5.44 5.40 5.45 6.29 6.30
2.00 5.42 5.35 5.38 6.20 NA
3.00 5.32 6.00 NA
4.00 5.95 NA
5.00 5.90 NA
10.00 NA

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Published: 10/26/22 Author: Thomas R. Fitzgerald