Third Quarter ECI Will Keep Fed Firmly in Hiking Mode

  • Treasury prices are under a bit of pressure this morning as higher inflation prints in Europe have bonds on the back foot as the weekend approaches. The 10yr Treasury is off 14/32nds to yield 3.98% as the 4% level remains a magnet, both from above and below. Still, for the week the 10yr Treasury has shed nearly 30bps in yield as signs of a slowing economy continue to grow.


  • This morning, we received the third quarter Employment Cost Index which grew by 1.2% for the quarter vs. 1.3% in the second quarter. On an annualized basis that’s 5.0% which will is still too hot for the Fed which wants it to drop below the long-run average of 4.2% to quell the feared wage-price spiral. So, this report will not alter the Fed’s rate-hiking calculus next week, nor December as well.


  • The September Personal Income and Spending Report was also released this morning and it came pretty much as expected. All the results were part of third quarter GDP that was released yesterday but today’s report does provide a look at the trajectory of income, spending, and inflation as we headed into the fourth quarter. Incomes were up 0.4% matching expectations and beating the 0.3% gain in August. Personal spending was up 0.6%, beating the 0.4% expectation and the 0.4% increase in August. Overall PCE rose 0.3% matching expectations and the August result. On a YoY basis PCE remained at 6.2% for a second straight month. Core PCE rose 0.5% matching expectations but off the 0.6% of August. YoY core PCE, however, rose 5.1% vs. 5.2% expected and 4.9% in August.


  • The net of all these numbers is that the Fed will be emboldened to continue with rate hikes, with 75bps in December back on the table after some weaker releases earlier in the week started to shift the odds to 50bps.


  • As we’ve mentioned before, inflation, whether CPI or PCE, has been sticky with smallish monthly numbers from 2021 rolling off which has kept the YoY results elevated. That will begin to change with the October, November, and December reports and into 2023 as more crooked numbers start to roll off. The problem is that the new monthly numbers need to retreat to the 0.2% and 0.3% range and with the lagging nature of owners equivalent rent and its nearly 40% weighting in the core CPI series the coming decline in core inflation will be grudging, at best.


  • Later this morning, we’ll get another look at housing activity with pending home sales for September. The pending sales report is based on contract signings and not closings so it’s one of the more real-time measures of housing activity. For September, sales are expected to have dropped 4.0% for the month and on a YoY basis as of August sales have plunged 22.5%.  Expect more of the same as the September rate hike and rate hikes to come further slow activity.





Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.02 5.45 5.50 5.55 6.45 6.55
0.50 5.00 5.35 5.38 5.45 6.40 6.40
1.00 5.00 5.40 5.37 5.40 6.25 6.25
2.00 5.39 5.35 5.35 6.15 NA
3.00 5.30 5.95 NA
4.00 5.90 NA
5.00 5.85 NA
10.00 NA

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Published: 10/28/22 Author: Thomas R. Fitzgerald