This Week Should Provide Some Key Answers for Investors

    • By the time we get to the weekend, we should have a lot more information in hand in regards to both the economy, the labor market, and monetary policy.
    • The FOMC meeting’s rate decision on Wednesday is the highlight of the week, and the question is not so much the hike itself that day but how hawkish the Fed will be which will guide investors’ expectations for hikes to come.
    • If recent history is any guide, we expect the Fed to continue to strike a significantly hawkish tone that implies a series of 50bps after May’s and quantitative tightening beginning during the month with around a $60 billion reduction in monthly balance sheet purchases.
    • Those figures have been mentioned several times in the last month, so if that is what we get it shouldn’t create excess volatility. But if the Fed comes out of the meeting and press conference talking about not only getting to neutral on rates (i.e., 2.50%) by year-end but moving decisively above that to quell inflationary forces that will encourage another bout of selling on the short to intermediate part of the curve.
    • Last Friday’s Employment Cost Index’s record print for the first quarter could be just the thing to boost their rate-hiking urgency. We’ll have to see on Wednesday, and it will come only in comments from Chair Powell as the dot plots won’t be refreshed until the June meeting. So be on the alert for mention of concern over gathering wage pressures.
    • The jobs numbers on Friday will be another tell for investors with the wage numbers in that report probably the most critical piece of data. Average Hourly Earnings are expected to increase 0.4% in March, matching the gain in February while the year-over-year number is expected to ease only slightly to 5.5% vs. 5.6% the prior month. Outside of the spike in wages coming out of the lockdowns in 2020, mid-5% YoY wage gains are the largest dating back to the series’ 2007 inception.
    • The Fed will want to see expanding labor force numbers in the jobs report as those higher wages bring more people back from the sidelines. If they don’t see that it will signal continued upward pressure on wages which will only add urgency to their rate-hiking plans.
    • While at the same time the Fed will be contemplating how quickly and how high to hike rates, they need to keep one eye out to the slowing economic picture in both China and to a lesser degree in Europe. The slowdowns there could lessen some commodity demand and therefore price pressures. And our own first quarter GDP numbers point to lesser growth in 2022 than perhaps was thought just a few months ago. Aggressive rate hikes in a slowing global economy can be a difficult combination.
    • As for this morning, Treasury prices are lower as not many investors are willing step into the market with size until some of the coming events pass and some unknowns are answered.
Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 2.74 2.98 3.11 3.28 3.53 3.99
0.50 2.73 2.95 3.04 3.17 3.38 3.88
1.00 2.72 2.92 3.01 3.13 3.29 3.75
2.00 2.91 2.96 3.05 3.18 NA
3.00 3.00 3.11 NA
4.00 3.07 NA
5.00 3.03 NA
10.00 NA

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Published: 05/02/22 Author: Thomas R. Fitzgerald