There were very few changes with Bond yields this week as markets continue to assess incoming data and the ongoing regional banking crisis to determine if the Federal Reserve’s most aggressive tightening cycle in 40 years is finally over. For the week, the 10yr yield fell 4bp to 3.40% while the 2yr was unchanged at 3.91% and the 3mo yield fell 6bp to 5.14%. The 10yr-3mo yield spread stands at -174bp, the most negative on record and clear indication the markets see a recession coming and the potential for rate cuts beginning in Q2.
This week began with the release of the latest Senior Loan Officer Survey from the Federal Reserve that showed banks tightening credit standards for C&I, CRE, and consumer loans even as loan demand fell again. Many economists worry the regional banking crisis that began with the failure of Silicon Valley Bank will cause further credit tightening as banks reign in lending and shore up liquidity. Tighter credit conditions and falling loan demand will add to the economic pain caused by 500bp of rate hikes and makes a recession in 2H 2023 more likely.
There was good news on the inflation front with both CPI and PPI coming in lower than expected on an annualized basis. CPI rose 4.9% from a year ago in April, down from a peak of 9.1% in June 2022 while PPI rose just 2.3%, down from a peak of 11.6% in March 2022. Inflation continues to fall towards the Fed’s stated target of 2%, but core inflation remains stubbornly high with Core CPI falling only slightly to 5.5%.
Tighter credit, weakening economic data, and falling inflation have all contributed to markets belief that the May rate hike will be the last and the Fed will be cutting rates in Q2. Current fed funds futures show just a 10% chance the Fed will hike rates in June, a 38% they will cut in July and a 76% they will cut by September.
Next week we’ll get a slew of economic data and no less than 14 speeches from Fed officials, increasing the potential for market volatility. On the data front, we’ll get reports on Retail Sales, Industrial Production, Housing Starts, Building Permits, Existing Home Sales, and Leading Economic Indicators. Maybe more importantly, all the Fed speeches will give us a better indication of whether Fed is finished raising rates or whether they believe more restrictive monetary policy is still necessary to bring inflation down to their target despite the increasing number of headwinds facing the economy. Stay tuned.
Annual CPI by Component Since 2017
Source: Bloomberg, L.P.
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