Treasuries Rethink a Fed Pivot

  • Treasury yields are higher this morning as investors rethink the probabilities of a Fed pivot anytime soon. While the UK backed off from its inflation-inducing fiscal plan, the central bank of Australia hiked rates by 25bps when 50bps was expected, and the flight-to-safety trade around Credit Suisse Bank all aided the argument for a possible Fed pivot, there was enough push back in Fed speeches to dim the odds of a near-term pivot.


  • New Fed Governor Phillip Jefferson made his debut speech yesterday and sounded just like all the other Fed speakers of late that much remains to be done on inflation, and he is particularly worried about wage-price inflation stemming from the tight labor market. So, don’t expect any change in the hawkish rhetoric, and if anything, the two-day equity rally may encourage an even sterner tone. Recall how the July equity rally met with considerable pushback by the Fed, so we could be in store for more of the same. Fed presidents Kaskhari and Bostic will take part in a moderated Q&A today on inflation so look for those headlines this morning.


  • Also dimming the mood in the financial markets this morning was the central bank of New Zealand hiking rates by an expected 50bps but they mentioned that 75bps had been discussed. Their hikes are not so much an attempt to beat back inflation but to defend their currency against dollar strength. That is a story we’ve heard from an increasing number of countries and are likely to hear again as the Fed remains resolute in getting to their forecasted terminal rate of 4.50% – 4.75%.


  • The August JOLTS report yesterday did provide some good news for the Fed as the job opening level dropped by over one million people to just over 10 million, but that is still a level the Fed will want to see continue moving lower. The openings to unemployed rate dropped to 1.7 which represents a nice dip as well, but as the graph below illustrates there is still plenty of room to move lower and the Fed will be looking to continue hiking until that happens to slow the demand for labor.


  • Speaking of labor, the September ADP Employment Change release is out this morning with 208 thousand new private sector jobs vs. 200 thousand expected and 185 thousand in August. That August print was adjusted higher from an initially reported 132 thousand. While the ADP recently changed its methodology, it appears issues remain with the reported information. One piece of data that the Fed will not like is annual wage gains for job-stayers was 7.8% while job-changers was double at 15.7%. That reflects tightness in the labor market and the advantages that employees hold now in wage negotiations.


  • Later this morning, the ISM Services Index for September will be released, and it’s expected to slip from 56.9 to 56.0. The manufacturing survey that was released on Monday disappointed at 50.9 vs. 52.8 in August with new orders contracting to 47.1 vs. 51.3 in August. The hand-off from the goods-side of the economy to the services-side is well under way and that is clear both in these ISM reports and in personal spending data. The bad news there is that the services-side has more of the “sticky” inflation components, like owners equivalent rent, and that will prevent any notable improvement in core inflation for the next several months.

Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.00 5.10 5.00 5.09 5.12 5.57
0.50 5.00 5.07 5.00 4.98 4.98 5.46
1.00 4.98 5.04 4.97 4.94 4.88 5.33
2.00 5.01 4.90 4.86 4.77 NA
3.00 4.81 4.70 NA
4.00 4.65 NA
5.00 4.62 NA
10.00 NA

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Published: 10/05/22 Author: Thomas R. Fitzgerald