Treasury Yields Continue to Creep Higher

• Another round of global risk asset selling has our markets ready to open lower and Treasuries are going along for the ride. S&P 500 equity futures are indicated lower by 51 points to 3868. The index bottomed at 3685 in June, so still a distance away but a retest of that low seems to be in the cards as the FOMC meeting looms.

• With the coordinated monetary tightening of the major central banks, and the persistence of inflation, global equity markets are busy repricing lower as the prospects of a global recession grow by the day. It’s more a matter of how deep that recession will be that the market is casting about for now.

• That outlook has the 2yr note hitting new cycle high yields this morning at 3.90%, the highest 2yr yield since 2007, as the Treasury market reprices to an even more aggressive expected path for Fed rate hikes.

• That expected path now has the Fed hitting 4.00% by year-end with additional hikes in 2023 and the rate peaking just under 4.50% by March 2023. The market has that peak rate immediately being cut in subsequent months and ending 2023 at 4.00%. That quick reversal to easing flies in the face of Fed commentary that the terminal rate, wherever that is, will be held for some time. How that difference of views is resolved implies more market volatility lies ahead.

• Also, part of the early weakness this morning was brought on by FedEx announcing plans to close offices, park aircraft, and freeze hiring in response to a decline in shipping volumes on a global basis. The company is something of a canary-in-a-coal mine in detecting economic trends and it certainly adds evidence that a global slowdown has begun.

• It could be that we will soon begin to see clear evidence of a slowing economy, but with core inflation remaining sticky into early 2023 rate hikes will continue. While we don’t doubt the Fed’s resolve to wrestle inflation lower with rate hikes, the fourth quarter and first quarter next year could be the first test of the Fed’s resolve as economic weakness deepens.

• Ever since the August CPI report on Tuesday delivered its gut punch, the market has staggered through the week and finds itself with the last report of consequence later this morning in the University of Michigan Sentiment Survey. While some improvement in consumer sentiment is expected, due to lower gas prices, the more important numbers will be the pair of inflation expectations. The Fed is big on keeping those expectations anchored as they tend to become self-fulfilling. The 1yr outlook is expected to tick down to 4.6% vs. 4.8% in August and the longer-term 5-10yr outlook is expected to match August at 2.9%. If those levels come to pass it will be decent news for the Fed, that while both are too high for comfort, they aren’t drifting higher.

2yr Treasury Yield Approaches 4.0%

Source: Bloomberg