Will We Get the Pause that Refreshes Today?
Will We Get the Pause that Refreshes Today?
- Treasury prices are drifting higher this morning with equities looking to rebound after yesterday’s losses, but the rebound looks tentative at this point. Trading should be quiet until the Fed decision at 2pm ET and the subsequent press conference, then expect the usual knee-jerk volatility for the balance of the afternoon. Currently, the 10yr is yielding 3.40%, while the 2yr is yielding 3.96%. We’ll see where they land after 2pm ET.
- The latest fed funds futures expectations are at 88% odds of a 25bps hike, and they have been holding steady in that range for the last two weeks, so call the hike a done deal. The question is if the statement, or Powell, acknowledge the Fed will be pausing for a meeting or two to assess the state of banking and credit in the wake of the recent turmoil. The market is expecting a pause and then cuts beginning soon thereafter. While we think Powell gives us the pause, probably dressed in plenty of caveats, it will be interesting to see the degree of pushback he delivers on the idea of rate cuts later this year.
- The March forecast did not have the Fed cutting rates until 2024, and members have been generally consistent in their subsequent communications that they expect the terminal rate to remain in place through 2023. Some of the more hawkish members, however, still see the terminal rate moving higher than today’s level of 5.00-5.25% so that will be something else to be fleshed out in today’s meeting.
- While the banking turmoil has certainly tightened credit conditions, the amount of that tightening remains unclear, especially after the First Republic drama this week, so a pause at least for the June meeting seems a prudent thing at this point. Next week brings the Fed’s Senior Lending Officer Survey that will provide more detailed information on credit tightening, but alas, that won’t be available for today’s meeting. The next FOMC meeting after today is on June 14 followed by July 26.
- Also, the job market may have a say in the Fed’s pause decision. Today’s ADP Employment Change Report doesn’t make the pause case any easier. ADP reported 296 thousand new private sector jobs in April when only 150 thousand were expected and much higher than the 142 thousand reported the prior month. Compared to the BLS report ADP has been missing to the low side by about 100 thousand so today’s beat could mean another strong job report is in the offing come Friday. The expectation for private nonfarm payrolls is for only 156 thousand new jobs. Given the trend of late with ADP does that portend a huge upside surprise or is this merely ADP reversing its earlier trend? We shall see but it does add another element of intrigue to the report and its potential impact on any intention by the Fed to pause after today.
- In any event, we will be back with a review of the FOMC rate decision and statement, and hopefully some early reaction from the Powell press conference.
Fed Funds Futures See 88% Odds of a Rate Hike Today
Agency Indications — FNMA / FHLMC Callable Rates
| Maturity (yrs) | 2 Year | 3 Year | 4 Year | 5 Year | 10 Year | 15 Year |
| 0.25 | 4.76 | 4.51 | 4.48 | 4.50 | 4.73 | 5.20 |
| 0.50 | 4.75 | 4.48 | 4.42 | 4.39 | 4.59 | 5.08 |
| 1.00 | 4.74 | 4.45 | 4.39 | 4.35 | 4.50 | 4.96 |
| 2.00 | – | 4.44 | 4.33 | 4.27 | 4.38 | NA |
| 3.00 | – | – | – | 4.22 | 4.32 | NA |
| 4.00 | – | – | – | – | 4.27 | NA |
| 5.00 | – | – | – | – | 4.24 | NA |
| 10.00 | – | – | – | – | – | NA |
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