The Market Today

Quiet Week Starts with Some Fedspeak


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Fed Communications: Fed Chair Powell is scheduled to speak at the NABE conference at 11:000 a.m. CT.  Atlanta Bank President Bostic, not a voter in 2022, spoke this morning saying that the Fed needs to get its overnight target rate to the neutral rate as soon as possible.  He indicated his belief is the neutral rate is now near 2.25% and he favors six hikes this year followed by two in 2023.

Chicago Fed Index: The Chicago Fed’s National Activity Index fell from 0.59 to 0.51 in February. The CFNAI is an aggregation of 85 different economic variables designed to be an indicator of changes in the overall economic landscape.  For example, when the CFNAI’s three-month average is above +0.70 following an expansion, a period of more rapid inflation is expected to occur.  Indicators of geopolitical unrest are not included.  The 3-month average for the CFNAI inched down to +0.35.


OTHER ECONOMIC NEWS

ICYMI – March 18, 2022 Weekly Market Recap: Treasury yields hit new cycle-highs last week and portions of the curve inverted after the Fed raised rates for the first time since 2018 in a surprisingly hawkish decision. The statement acknowledged that inflation had broadened out beyond pandemic-impacted categories and its persistence led officials to significantly ratchet up the inflation forecast over the horizon. Core PCE inflation is now expected to average 4.1% in the fourth quarter, a significant upward revision from the 2.7% estimate in December, and 2.3% at the end of 2024, compared with 2.1% in previously. In response, the statement noted the Fed “anticipates that ongoing increases in the target range will be appropriate” and that shrinking the balance sheet will begin “at a coming meeting.” That was consistent with the significant shift higher in the Fed’s refreshed dot plot. The median official expects the fed funds target (midpoint) to end the year at 1.875%, the equivalent of six additional quarter-point hikes this year and a drastic change from the previous expectation of 0.875%. Fed Chair Powell didn’t shy away from the hawkish signal, saying repeatedly that the Fed would use its tools to restore price stability. Twenty-four hours later, and reinforcing that shifting central bank posture amid decades-fast inflation isn’t a unique U.S. phenomenon, the Bank of England raised its target rate 0.25% to its pre-pandemic level of 0.75%, its third consecutive hike. By the end of the week, the 2-year Treasury yield had risen 18.8 bps to 1.94%, its highest level since May 2019. The 5-year and 10-year yields drifted lower on Thursday and Friday, ending just below cycle-highs at 2.14% and 2.15%. Away from the Fed, there was plenty of economic data in the U.S. and globally (details in the full recap) and contradictory signals about diplomatic progress in talks between Russia and Ukraine. Click here to view the full recap.


TRADING ACTIVITY

Treasury Curve Extends Post-Fed As Inversions Continue: Treasury yields extended last week’s rise overnight Monday following the Fed’s first rate hike since 2018 in what turned out to be a surprisingly hawkish decision (more above). With the Fed signaling it expects to raise rates by the equivalent of a quarter-percentage point at each meeting for the remainder of the year, shorter Treasury yields continued to lead the curve’s advance. The 2-year Treasury yield earlier rose more than 6 bps and crossed above 2.00% for the first time since May 2019. Fed funds futures earlier this morning were pricing in a convincing probability that the Fed could push their target range up another 1.75% to around 2.00% by year’s end. The 3-year and 5-year yields both rose by similar amounts and were inverted with, or higher than, the 10-year yield. A recent surge in commodity prices following Russia’s invasion of Ukraine exacerbated central banks’ inflation concerns and added additional uncertainty to an already delicate economic situation. Despite erasing a large chunk of the most severe increases, oil prices were higher again Monday. The 4% jump extended a late-week recovery that reversed U.S. WTI’s sharp downtrend from more than $130 per barrel to around $95 last Wednesday and pushed the popular U.S. crude product back above $109. Despite some sparse reports of diplomatic progress, the war in Ukraine continues with flimsy evidence to date the two sides may be able to actually reach a peace agreement. Despite more substantial moves in other markets, global equities were relatively calm. Asian equities posted a mix of gains and losses and Europe’s Stoxx 600 was 0.2% higher. In the wake of the strongest week for U.S. indices since late 2020, U.S. equity futures were mixed and hovering around unchanged before 7 a.m. CT. At 7:30 a.m. CT, the Treasury curve was at session peaks and their highest levels since May 2019. The 2-year yield was 8.1 bps higher at 2.02%, the 5-year yield was up 8.8 bps to 2.231%, and the 10-year yield gained 7.9 bps to 2.28%.


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