The Totality of Incoming Data

  • Yields are being buffeted by Powell’s Capitol Hill testimony but for now bids are being found in early trading. While yesterday’s reaction to Powell’s hawkish testimony resulted in the 2yr – 10yr Treasury inversion reaching new cycle lows, there is a rebound in prices this morning. Powell continues his testimony today in the House with the Q&A the only chance for new information as the opening statement is a repeat of yesterday’s. Currently, the 10yr is yielding 3.90%, up 16/32nds in price, and the 2yr is at 4.97%, up 2/32nds in price.  The 2yr yield did get as high as 5.08% in overnight trading before buyers showed up on this side of the pond.


  • Investors took Chair Powell’s first day of Capitol Hill testimony to heart and sent the 2yr-10yr yield curve inversion to a new cycle low of -110bs this morning. While the market expected a hawkish tone from the Fed Chair the message was clearly conveyed that the terminal rate will be higher than the December projection, and that returning to 50bps rate hikes is possible considering “the totality of incoming data.”


  • The “totality of incoming data” really centers on two upcoming releases: the February jobs report due on Friday and the CPI report due next Tuesday.  If those reports print hotter-than-expected, then a 50bps rate hike at the March 22 FOMC meeting will likely get fully priced in by markets as well as a terminal rate easily exceeding 5.50% (see graph below).


  • As for projections, 224 thousand new jobs are expected for February along with an unchanged unemployment rate of 3.4%. Average hourly earnings are expected to increase 0.3%, matching the January gain, while the YoY rate is expected to increase 4.7% vs. 4.4% the prior month. That expected increase, if it comes to pass, will cause some indigestion at the Fed but recall the YoY rate peaked at 5.9% a year ago, so the pace of gains is moderating, just not as fast as the Fed wants, and that too could keep the 50bps discussion in play.


  • Speaking of jobs, the ADP Employment Change report is out this morning with a beat on private sector jobs (242k vs. 200k expected). While that might cause some nervousness over the upcoming BLS payrolls number, recall that for January ADP reported only 106 thousand jobs (revised up to 119 thousand today) vs. the January BLS’s whopping gain of 517 thousand, so take what you will from today’s ADP beat.


  • Looking ahead to next Tuesday’s CPI report, it’s expected to post stable gains with the overall up 0.4% vs. 0.5% in January, while the core rate is expected up 0.4%, matching the January gain.  The YoY overall rate is expected to dip to 6.0% vs. 6.4%.  The core YoY rate is expected to dip more grudgingly to 5.4% vs. 5.6% in January. Those YoY rates, while still a far cry from the 2% benchmark (which is based on PCE not CPI), are an improvement from the 6.6% high core print last September and 9.1% last June for the overall. So, while Powell gives little recognition to the improvements in the inflation picture to date, lest he provoke stock and bond rallies and easing financial conditions, improvement is happening.


  • Later this morning (10am ET), another key employment report will be released with the Job Openings Labor Market Turnover report for January. Powell has often cited this report in recent months as a clear example of the ongoing strength in the labor market. For January, job openings are expected to dip slightly to 10.546 million vs. 11.012 million in December.  Openings peaked at 11.855 million a year ago, so the trend is moving in the Fed’s desired direction but just not fast enough for their liking as it still signals nearly two job openings for every unemployed person.



Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.83 5.59 5.47 5.40 5.31 5.77
0.50 5.82 5.56 5.41 5.29 5.16 5.66
1.00 5.81 5.53 5.38 5.25 5.07 5.53
2.00 5.52 5.32 5.17 4.96 NA
3.00 5.12 4.89 NA
4.00 4.85 NA
5.00 4.81 NA
10.00 NA

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Published: 03/08/23 Author: Thomas R. Fitzgerald