The Market Today
Consumer Credit Surges; Bullard Calls for 3.00-3.25% by Year-End
by Craig Dismuke, Dudley Carter
Economists’ Forecasts Likely Chasing Actual Rise in Yields: The Bloomberg Survey of Economists is set to be released at 8:00 a.m. CT. Since the release of the March survey, expectations for the rate path have changed notably. Expectations for where Fed Funds will be 12 months forward have risen 1.04%, the largest such increase of the cycle. This has driven 2-year Treasury yields up 0.84% during this time, also the largest increase of the cycle. The 10-year Treasury yield is up to 2.71% this morning versus 1.95% at March release. Economists’ rate projections are likely to have been ratcheted higher yet again.
Inventory Rebuild: Also on today’s calendar, February’s wholesale inventories report is expected to show further rebuilding of inventories.
OTHER ECONOMIC NEWS
Bullard Believes the Fed’s Behind the Curve: St. Louis President Bullard continued to fly ahead of the kettle of Fed hawks in a speech on Thursday, calling for raising rates to a range of 3.00% to 3.25% by the end of the year on the way to at least 3.50%. Based on certain rule-based models, “One concludes that the current policy rate is too low by about 300 basis points,” Bullard said. But because Treasury yields have risen so sharply this year in anticipation of faster Fed tightening, raising the risk-free benchmark for U.S. lending rates, markets have already done some of the Fed’s job for them. “This suggests the Fed is not as far ‘behind the curve,’” Bullard noted, “although it would still have to raise the policy rate to ratify the forward guidance.” In a frank comment, Bullard said, “We want to do that in a way that doesn’t cause too much disruption. But on the other hand we do have a serious inflation issue and we have to move forthrightly.” “The expansion is not ‘old’ and can continue for a long time,” Bullard sanguinely surmised, but the recent curve inversions are reasons to be attentive. “This market-based signal has been an accurate predictor of recessions in the postwar data, and so it must be taken seriously,” Bullard said.
Fed’s Evans and Bostic Propose More “Measured” Move Towards Neutral: Chicago Fed President Evans and Atlanta Fed President Bostic appeared together Thursday, both signaling a desire to move at a less drastic pace than their colleague from St. Louis. Evans said it’s appropriate for the Fed to move rates towards a neutral setting by the end of this year or early in 2023. Bostic concurred, saying the Fed can proceed with tightening policy towards a more neutral position in a “measured way.”
Consumer Credit Surged by a Record in February: Consumer’s credit impulse came back with a vengeance in February after new borrowing slowed in January to its weakest pace in twelve months. Excluding real estate related borrowings, data from the Federal Reserve showed remaining consumer credit balances jumped by a record $41.8 billion in February. The monthly jump was driven by strong gains in both the revolving categories, which primarily reflect credit card balances, and the nonrevolving categories, which include borrowings for items such as student loans and autos. Revolving debt increased by $18b, the third largest gain on record, or at an historically strong 20.7% annualized rate. Nonrevolving credit rose $23.8 billion or at an annualized rate of 8.4%, also historically strong changes.
Stocks Partially Recover As Yield Curve Continues to Steepen on Extended Climb for Longer Yields: U.S. equities partially recovered some of Wednesday’s declines but are still on pace for a weekly loss as longer Treasury yields extended their recent surge. The S&P 500 rose 0.4% Thursday after sliding 1.0% in the prior session, trimming its weekly decline to 1%. Health care stocks led most sectors higher and energy closed in the second slot despite U.S. WTI settling lower for a third session at $96 per barrel, its lowest close since mid-March. Oil prices fell sharply Wednesday after the International Energy Agency announced a coordinated global release of 120 million barrels from national stockpiles, a figure that includes 60 million barrels of the 120 million the Biden administration previously said it would release from the Strategic Petroleum Reserve. Banks continued to struggle amid increased economic uncertainty ahead of earnings season, despite significantly higher rates over the last month and the Treasury curve regaining some positive slope this week. The 10-year yield climbed another 6.0 bps Thursday, taking its weekly gain to more than 27 bps. The close at 2.66% marked a new high since March 2019. The 5-year yield rose 2.6 bps to 2.71%, its highest close since December 2018 and still inverted with the 10-year yield. The 2-year yield slipped 1.2 bps to 2.46%, despite a Fed hawk calling for 2.75% of additional tightening this year (more above). The spread between the 2-year and 10-year Treasury yields widened for a fourth consecutive session to 19.2 bps, a nine-day high, after closing last Friday at the deepest inversion since 2007.
Global equities rose Friday following a tumultuous week of trading even as sovereign bond yields added to this year’s spectacular move higher. A trifecta of forces have been at the fore of investors’ focus in recent weeks and continued to develop over recent days. The continually evolving outlook for Fed policy has become even more intense following remarks from Fed Governor Brainard on Tuesday and the Fed Minutes on Wednesday, both indicating plans for an aggressive runoff of the central bank’s securities portfolio. Reports of Russia killing civilians surfaced last weekend, leading the U.N. to kick the country off of its Human Rights Council indefinitely. Additional reports Friday indicated Russia had attacked civilians at a train station in Ukraine. The virus situation in China is increasingly somber with Shanghai reporting a new record for daily infections on Friday. Nevertheless, stocks bounced back in the region and Europe’s Stoxx 600 rose more than 1%, nearly erasing losses accumulated over the prior two sessions. U.S. equity futures were also higher by 0.2% to 0.4% before 7:30 a.m. CT, even as the 10-year Treasury yield climbed for a sixth consecutive session. The benchmark yield was 2.9 bps higher to 2.69% at 7:35 a.m. CT, a new high since March 2019. The 5-year yield added 4.6 bps to 2.75%, its highest level since December 2018. The 2-year yield led most gains, jumping 5.6 bps to 2.52%, a new high back to March 2019 and the first flattening move this week.