The Market Today

Investors Monitor Russia-Ukraine Negotiations As They Watch 2s10s Close In on 0.00%


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Home Price Gains Expected to Remain Brisk: Home prices are expected to have remained brisk in January based on economists’ forecasts for the latest results from the FHFA and S&P CoreLogic. The FHFA metric is projected to have risen 1.2% while the S&P CoreLogic metric is forecasted to have risen 1.5%. A monthly change of that magnitude would leave the annual rate from S&P CoreLogic just below 18.6%.

Consumer Confidence Expected to Fall in Conference Board Report: The Conference Board will release its Consumer Confidence Report for March at 9:00 a.m. CT. The index is expected to show a third consecutive monthly decline to start 2022 to 107.0, its weakest reading since September and second weakest result since February 2021. The Conference Board’s index, more heavily tied to the state of the labor market, has held up relatively well compared to its counterpart from the University of Michigan. An update last week revised the latter measure down to its second-lowest level since 2009 behind a single lower reading in 2011. Near-term inflation expectations in that report rose to their highest level since 1981.

Job Openings Expected to Drift to Still-High Level: The BLS will report on the level of job openings, quits, and layoffs for the month of February at 9:00 a.m. CT. The JOLTS report, among the most lagged of the labor data, is expected to show openings drifted down for a second month from last December’s all-time high to the third highest reading ever recorded. An as-expected reading of 11mm openings would tower over the 6.27mm unemployed workers that month. The projected 1.75 job openings per unemployed worker would equate to the second tightest reading ever behind last December.

Fed Officials Speak: New York Fed President Williams, a current-year voter, will offer opening remarks at a conference unrelated to monetary policy this morning at 8:00 a.m. CT. Williams said last Friday that he is open to implementing 50-bp rate hikes if the data warrant. Philadelphia Fed President Harker will speak on his outlook for the economy at 9:45 a.m. CT and Atlanta Fed President Bostic will discuss economic leadership later this evening. Harker has voted as an alternate member on the FOMC this year due to the temporary vacancy at the Boston Fed. Bostic will not vote on policy again until 2024.


OTHER ECONOMIC NEWS

Dallas Fed Manufacturing Index Drops as Uncertainty and Inflation Rises: The Dallas Fed’s Manufacturing Activity Index fell from 14.0 to 8.7 in March, disappointing expectations for a smaller decline to 11.0 and roughly in line with its prior six-month average. Employment recovered modestly while activity indicators softened, including the weakest reading on new orders since January 2021 and the slowest pace of shipments since June 2020. Importantly, considering the Fed and market’s current focus on inflation, the wages index accelerated to its highest level in records kept since 2004 and the prices paid indices moved up. An index tracking company-specific outlooks turned negative for just the second time since the initial onset of the pandemic in the first half of 2020.

President Biden’s FY23 Budget Plan Looks to Boost Defense Spending and Taxes: President Biden released his budgetary desires for the upcoming fiscal year in a $5.8 trillion plan that boosts defense spending and aims to cut the deficit by raising taxes on high-income individuals and corporations, but notably leaves key components of his social spending agenda up to separate discussions. According to Bloomberg, the budget includes $1.598 trillion in discretionary spending, divided into $813 billion for defense programs and $769 for the domestic agenda. The plan proposes cutting the deficit, in part by raising taxes in what Bloomberg described as “the biggest tax increase in history in dollar terms.” The WSJ noted that households worth more than $100 million would face a minimum tax rate of 20%, including on unrealized capital gains, while Bloomberg pointed out the latest budget kept the previous call to raise the corporate rate to 28% and lift the highest individual rate to 39.6%. The national debt would continue to rise as a share of economic output, albeit at a slower pace than the prior budget projections, assuming a quick moderation for inflation and annual growth of 3.8% this year and 2.5% in 2023, an outlook the WSJ noted was “a rosier outlook than that of the Federal Reserve.”


TRADING ACTIVITY

Increasingly Aggressive Fed Bets Continue to Flatten Treasury Curve: Stocks were volatile Monday as investors continued to absorb last week’s incredible yield surge and contemplate what the Treasury curve continuing to flatten, a product of the Fed’s increasingly aggressive posture, means for the outlook more broadly. The S&P 500 flipped between gains and losses during the morning session, falling to its daily low just before lunch. An afternoon recovery, however, sent the index to a gain of 0.7% and a close at session highs. Tech-related companies outperformed while energy led declines across more cyclically sensitive industries. The Nasdaq led with a 1.3% rally while the Dow trailed to end just 0.3% higher, sanguine performances considering the unsettled tone emanating from the Treasury market. Rates extended last week’s Fed-induced surge overnight but had moderated by the start of U.S. trading. Shorter yields resumed their climb during the U.S. session while longer yields floundered. Fed funds futures finished Monday expecting 2.13% of additional policy tightening this year, the equivalent of more than 8 additional 25-bp hikes this year; more detailed pricing shows that 50-bps hikes are considered strong possibilities at the next several meetings. A 2-year Treasury note auction tailed, reenergizing the move up in shorter yields. A subsequent auction of 5-year notes stopped through and bidding metrics reflected relatively stronger demand. For the day, the 2-year yield rose 5.8 bps to 2.33% while the 10-year yield drifted 1.5 bps lower to 2.46%, tightening the spread between the two to less than 13 bps, the lowest since February 2020. The 5-year yield rose 1.1 bps to 2.56%, cementing its first close above the 30-year yield, which fell 4.5 bps to 2.54%, since March 2006.

A tangible risk-on tone lifted global equities Tuesday and extended a sell-off in sovereign debt securities. European markets were setting the pace in both the equity and sovereign debt markets as investors monitored hints of progress in peace negotiations between Russia and Ukraine. Face-to-face talks resumed Tuesday in Turkey with reports within the last hour indicating that Russia had agreed to “sharply cut military operations near the Ukrainian capital of Kyiv and Chernihiv,” according to Bloomberg, and Ukraine opened the door to ceding control of certain separatists regions. The headlines sent Europe’s Stoxx 600 to a session-best 1.9% gain and pushed European yields between three and five years up by double digits. Germany’s 10-year yield jumped to 0.69%, its highest level since February 2018, while its 2-year yield broke into positive territory for the first time since August 2014. Oil prices slumped more than 4%, extending a weekly decline that began after China announced it was commencing a two-phase lock down of Shanghai beginning Monday. The geopolitical developments pushed U.S. equity index futures up by 0.6% on average and continued to apply upward pressure on Treasury yields. The 2-year yield was 3.8 bps higher to 2.40% at 7:25 a.m. CT while the 10-year yield rose 2.4 bps to 2.48%, flattening the spread between the two securities to 8 bps; the spread fell below 6 bps overnight at its most extreme. Yields trimmed their increases to less than 1 bp at 7:45 a.m.


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