• The week opens with Treasuries rallying on a combination of flight-to-safety and talk that yield highs for this cycle may be in place. Since touching 4% last Wednesday the 10yr yield has fallen to 3.68% this morning, up more than a point in price. The flight-to-safety component revolves around rumors that Credit Suisse Bank is facing capital concerns. The stock has dropped from $9.99 last November to just under $4.00 in recent trading. Given the size of market moves this year it’s not surprising that rumors have started about the viability of certain leveraged companies, so expect more of the same in the months ahead, but make no mistake the US banking industry is in a much healthier state than it was in 2008.


  • The first full week of the month brings with it a quick read on September economic activity in the form of the twin ISM surveys (today and Wednesday) and the employment report on Friday.


  • The ISM Manufacturing Survey is due later this morning (10am ET) and is expected to decline slightly from 52.8 to 52.0. The ISM Services Index is due on Wednesday and is expected to also decline slightly from 56.9 to 56.0. Any reading greater than 50 represents an expanding sector and while both surveys are in the expansion category the trend of late has been to post lower month-over-month activity, particularly the manufacturing sector. It peaked in March 2021 at 63.7 and has been trending lower ever since. The services index peaked in November 2021 at 68.4 and has been trending lower too but had a little bounce in the last few months as the hand-off from the goods sector to services accelerated recently.


  • The September employment report is expected to see jobs grow by 265 thousand vs. 315 thousand in August with the unemployment rate unchanged at 3.7%. Perhaps more important to Powell and company in this report will be the labor force participation rate. It had a nice pop in August with it increasing three-tenths to 62.4% which is where it’s expected to remain in September. The Fed wants that rate to increase further hoping that previously sidelined workers return to the labor force easing some tightness in the labor market and ease wage gains. Average hourly wages are expected to increase 0.3%, matching the August increase, while year-over-year wages are expected to dip slightly to 5.1% from 5.2%. That will still be too high for the Fed which would like it to dip below the long-term average of 4.2% to prevent a wage-price spiral and keep inflation expectations anchored. Thus, it won’t alter the Fed’s rate -hiking calculus for next month which is still expected to be a 75bps hike.


  • Speaking of inflation expectations, the final read from the University of Michigan Consumer Sentiment for September saw long-term inflation expectations edge lower from 2.8% to 2.7% which is moving in the right direction, but the Fed will still want it to trend closer to their 2% benchmark.


  • Last Friday’s inflation read in the August Personal Income and Spending Report was disappointing with the core rate rising 0.6% which beat the 0.5% consensus and moved the YoY rate up to 4.9% vs. 4.7% in July. The increase was driven by increased spending on services vs. goods, and with services inflation running hotter (particularly the housing component) it will keep the Fed going on its current hiking plan.

Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 4.96 5.03 5.01 5.04 5.05 5.51
0.50 4.95 5.00 4.95 4.93 4.91 5.40
1.00 4.94 4.97 4.92 4.88 4.82 5.27
2.00 4.96 4.86 4.80 4.70 NA
3.00 4.76 4.64 NA
4.00 4.59 NA
5.00 4.55 NA
10.00 NA

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Published: 10/03/22 Author: Thomas R. Fitzgerald