The Market Today

Mammoth Shift in Expectations for Fed Policy

by Craig Dismuke, Dudley Carter


Slight Improvement in February Goods-Only Trade Data: The Advanced Goods Trade Balance showed the goods-only trade deficit declined $1.0bn in February, in-line with expectations.  Imports rose 0.3% MoM ($0.9bn) and exports gained 1.2% MoM ($1.9bn).  Despite the slight improvement in the trade balance, the trailing 12-month goods-only deficit is now the largest on record and does not appear as though it will support overall GDP in 1Q, a presumption coming into the year.

Inventory Rebuild Continues: Retail inventories rose 1.1% MoM, below expectations for a 1.3% gain.  Motor vehicle and parts inventories improved 0.9% but remain well below their pre-pandemic level.  At the wholesale level, the inventory rebuild beat expectations, rising 2.1% MoM along with revisions higher to previous months’ results.  Combining the retail and wholesale reports, inventories increased $24.2bn in February, $7.6bn more than expected. The inventory data have proven better-than-expected to begin the year but are not expected to be significantly accretive to GDP after most of the turnaround was realized in the 4Q GDP tally.

Regional Fed Index, White House Budget: The Dallas Fed’s March report on regional manufacturing activity is expected to weaken (9:30 a.m. CT).  The White House is expected to release its 2023 budget plan this afternoon.  The plan is rumored to include $1tn in deficit reduction with at least part of that coming from an increase in taxes on wealthy persons.  The plan is unlikely to gain much traction given the stalemate that exists in Washington now, and presumably in the future.


ICYMI – March 25, 2022 Weekly Market Recap: Treasury yields extended their monthly surge last week as Chair Powell and a host of other officials doubled down on the messaging from the prior week’s Fed decision that monetary policy needs to be much tighter forthwith. Yields shot higher immediately as European markets opened and accelerated after Fed Chair Powell said in a Monday speech that the Fed would hike by 50 bps at upcoming meetings if the data warranted and wouldn’t hesitate to move into restrictive territory if officials believed it was necessary to bring down inflation. Jobless claims hit their lowest level since 1969. Several economic surveys released throughout the week indicated resilient economic activity amid increased uncertainty but no convincing signs of inflation pressures receding. Futures priced in an additional 2.00% of tightening this year for the first time after Powell’s speech. The spirit of Powell’s stronger message was echoed by officials across the dove-hawk spectrum, with a couple of current-year voters pushing for 0.50% hikes and another signaling such a move may become appropriate. After pulling back Wednesday, yields reversed higher again Thursday and soared Friday as markets ratcheted up expectations for how aggressive the Fed will be. Fed funds futures held pricing for more than 2.00% of tightening at Friday’s close, implying at least two 0.50% hikes this year. More broadly, the yield curve surged to its highest level since 2019. The 2-year yield spiked 33.6 bps to 2.27%, its biggest weekly increase since June 2009. The 5-year yield surged 40.3 bps to 2.55%, its largest weekly increase since June 2013. And the 10-year yield soared 32.4 bps to 2.47%, its biggest weekly move up since September 2019. Notably, the 10-year yield ended the week inverted to the 3-year, 5-year, and 7-year notes. Click here to view the full recap.


Maelstrom in the Treasury Market Moves Another Curve Measure into Inversion: The level and shape of the U.S. Treasury curve remained the major focus on Monday as investors ready themselves to receive several key economic reports this week, including the Fed’s prepared inflation measure on Thursday and the always-important monthly jobs report on Friday. Trading in global equities was mixed overnight and relatively uneventful. Stocks traded mixed across Asia as China began a two-phase lockdown of Shanghai for virus testing while European indices reported modest gains midway through the trading session. U.S. index futures were hovering a couple of tenths of a percentage point inside of positive territory before 7 a.m. CT. The mixed trade left investors preoccupied with the continued tumult within the Treasury market. The curve extended last week’s spectacular surge (more above), sparked by another round of repricing in futures markets for how aggressive investors anticipate the Fed will be in its quest to tame inflation. Shorter yields continued to outpace moves in longer yields Monday, pushing another closely watched yield comparison to invert. Measuring from the most extreme overnight levels, the 2-year yield jumped 13.8 bps to 2.41%, the 5-year yield rose 12.3 bps to 2.67%, and the 10-year yield added 8.0 bps to 2.55%. The continued upward pressure on shorter yields finally propelled the 5-year yield above the 30-year yield for the first time since 2006. Although the moves moderated ahead of U.S. trading, the worrying sentiment signals about the outlook remained. At 7:20 a.m. CT, the 2-year yield was 3.9 bps higher at 2.31%, the 5-year yield was up 0.7 bps to 2.55%, and the 10-year yield had drifted 1.3 bps lower to 2.46%. The spread between the 5-year and 30-year yields had uninverted (slightly) while the 10-year yield remained below the 3-, 5-, and 7-year yields. The 15 bps of spread between the 2-year and 10-year yields registers as the lowest since February 2020.

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