The Market Today

Treasury Yields Hit New Cycle-Highs As Fed Decision Looms


by Craig Dismuke, Dudley Carter

THIS WEEK’S CALENDAR

Busy Economic Calendar Centered on Wednesday’s Fed Decision: This week’s economic calendar includes several reports on housing, a couple of regional Fed surveys of activity in early March, industrial production results for February, and some second-tier inflation reports. However, the focus will be on Wednesday’s retail sales report and an all-but-certain increase in the Fed’s target rate range.

Fed Expected to Hike Rates As it Kicks Off “Series” of Increases to Rein in Inflation: Inflation has accelerated more than anticipated to its fastest rates since the 1980s as stimulus-fueled demand placed significant pressure on a global supply chain still hobbled by the pandemic. In response, Fed officials have clearly indicated they plan to begin a “series” of rate hikes at this week’s meeting as they seek to quell the strong inflation pressures without disrupting the recovery, now facing a new risk and uncertainty from the war in Ukraine. The Statement is likely to be amended on multiple fronts and, presuming the 0.25% rate hike is confirmed on Bloomberg terminal screens, markets will quickly turn to the new projections and Fed Chair Powell’s press conference for additional color or signals about the path ahead. The new projections are expected to include upward revisions for inflation, downward revisions for growth, and a steeper path of tightening for the remainder of the year. Any mention of further progress towards a concrete plan for beginning to shrink the balance sheet will also be a keen focus for markets.


TODAY’S CALENDAR

There are no economic reports on today’s calendar.


OTHER ECONOMIC NEWS

ICYMI – March 11, 2022 Weekly Market Recap: Stocks fell last week and sovereign rates rocketed higher on signs central banks will forge ahead with inflation-fighting plans, despite an already uncertain outlook being further complicated by the war in Ukraine. Oil staged a double-digit rally Monday following weekend reports that the U.S. was considering cutting of imports of energy commodities from Russia, pushing U.S. WTI briefly above $130 per barrel for the first time since September 2008. President Biden confirmed the decision on Tuesday just minutes after the U.K. announced it would phase out imports of Russian oil by the end of the year. Oil turned lower on Wednesday, however, in response to a comment from a UAE government official that his country would lobby OPEC to increase production and a remark from Ukraine’s President that he would consider a compromise. Despite oil’s reversal, Treasury yields extended their weekly climb after the ECB surprised markets with a hawkish decision and U.S. inflation remained broad and firm. The ECB said it would wrap up quantitative tightening earlier than anticipated, potentially opening the door to rate hikes sooner than previously expected. February’s U.S. CPI inflation data came in as expected, with annual price gains accelerating to their fastest rates since 1982. Strong inflation clearly had an impact on the two confidence reports released during the week. Confidence among small businesses and consumers both dropped more than expected, the former to its second lowest level since early 2020 and the latter to its weakest mark since 2011. The number of small businesses citing inflation as their biggest problem and near-term inflation expectations in the consumer survey both climbed to their highest levels since 1981. The 2-year yield rose 27 bps last week to 1.75%, its biggest weekly increase since June 2009 and highest level since September 2019. The 10-year yield jumped 26 bps to 1.99%, its strongest leap since September 2019 and fourth highest close since July 2019. Click here to view the full recap.


TRADING ACTIVITY

Treasury Rates Hit Highest Levels in Nearly Three Years As Investors Await the Fed: Treasury rates are on the rise again Monday following their sharpest weekly increases in several years (more above). The latest move higher is primarily the result of worries that the war in Ukraine and recent surge in commodity prices create considerable upside risk for inflation that is already running at historically fast rates. The ECB surprised markets last week by adopting a clearly more hawkish tone, signaling its level of concern about inflation is more potent than its worries about the coming growth impact of the war. The Fed is expected to follow suit this week with its first rate hike since 2018. Despite the continued upward move for sovereign rates, equities in Europe and U.S. futures were comfortably in positive territory earlier. Asian stocks, however, were generally weaker following severe declines for indexes in and around China. Concerns about COVID-19 outbreaks in China re-emerged over the weekend as China implemented new mitigation measures in several areas, including a week-long lock down of Shenzhen city. The major tech center is home to more than 17 million residents. Hong Kong’s Hang Seng index slumped 5.0% while China’s CSI 300 dropped more than 3%. Oil prices remain a major focus as well, dropping between 4% and 5% earlier as investors monitor the situation in China and latest round of talks between Russia and Ukraine. After breaking above $130 per barrel a week ago, U.S. WTI was trading around $104, its lowest level since February. Following the ECB’s decision last week and in front of the Fed’s announcement on Wednesday, global sovereign bond yields were notably higher. At 7:20 a.m. CT, the 2-year Treasury yield was 7.2 bps higher at 1.82%, its highest level since July 2019, as fed funds futures priced in their most aggressive 2022 rate path yet. Contracts now reflect a roughly 90% chance of seven rate hikes this year. The 5-year yield was leading all increases, adding 9.3 bps to 2.04%, its first print above 2.00% and highest yield since May 2019. The 10-year yield rose 8.6 bps to 2.08%, its highest mark since July 2019.


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The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
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