Treasury Yields Higher on Hot UK CPI

  • Treasury yields are higher this morning and yes, it’s again off news from the UK. The 10yr Treasury, which yielded a low of 3.96% yesterday hit a new cycle high of 4.11% this morning. Yields across the Treasury curve are following in similar fashion and equity futures are under pressure and will give up some of yesterday’s gains, despite some stellar earnings reports.

 

  • The impetus to the early market moves was a disappointing inflation read from the UK. September CPI rose 0.5% sending the yearly pace to 10.1% which matches a 40-year high. It’s also the eighth straight month of 0.5% prints or higher. Soaring food prices, clothing and housing were mostly to blame this month (sounds familiar) and with winter coming,  and larger outlays for heating, the UK economy could be entering a tough phase which certainly plays into the global slowdown story.

 

  • Back on this side of the pond, September housing starts and permits were expected to be disappointing, and they mostly delivered on that. Starts fell -8.1% vs. -7.2% expected but permits rose 1.4% edging out the -0.8% expectation. Starts are now running at levels that we saw back in early 2021 and permits are back to levels last seen in August 2020. So, higher mortgage rates are having the Fed’s desired impact of slowing what was once a red-hot sector.

 

  • The domestic economic calendar remains light for the rest of the week with September existing home sales tomorrow and that is also expected to show a slowdown with sales dipping to 4.6 million annualized which is a level last seen in May – June 2020 during the height of the Covid lockdowns.

 

  • As we mentioned on Monday, Fed speak will be a market driver this week with the dearth of economic releases, and late yesterday Minneapolis Fed President Neel Kashkari continued with the hawkish theme. He said that with core services inflation (including OER) still sticky and increasing in some cases that “I don’t see why I would advocate stopping at 4.5% or 4.75%, or something like that.”  With St. Louis Fed President James Bullard saying last Saturday that the December FOMC meeting could very well be another 75bps move vs. the previous expectation of a 50bps hike the chorus is being assembled to condition the market that a higher terminal rate may be needed to quell the sticky inflation forces. Bullard speaks later tonight so expect another bout of “higher rates may be needed.”

 

  • We’ve mentioned recently that the Fed speak lately has not allowed any nuance in discussions about the economy. It’s all about beating back inflation. Once they get closer to their perceived terminal rate, we think that may present an opportunity to allow some nuance to return in their economic discussions. When that day comes, most likely late this year or early 2023, perhaps they can start by acknowledging the lagged nature of OER which drives 40% of core and perhaps consider alternative measures that are more real-time and that already reflect a rollover in rental costs before they overtighten into a slowing economy. Just a thought.

Alternative Measures of Residential Rents

 


 

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.37 5.42 5.42 5.82 6.33 6.45
0.50 5.36 5.39 5.31 5.70 6.19 6.30
1.00 5.36 5.36 5.26 5.66 6.09 6.15
2.00 5.35 5.19 5.59 5.98 NA
3.00 5.54 5.91 NA
4.00 5.86 NA
5.00 5.83 NA
10.00 NA

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Published: 10/19/22 Author: Thomas R. Fitzgerald