The Market Today
Yields Continue Their Ascent; Economist Increasingly Concerned
by Craig Dismuke, Dudley Carter
There are no economic reports on the calendar today. Four Fed officials are on the tape today including Governor Bowman (V, 8:30 a.m.) Governor Waller (V, 8:30 a.m.), Atlanta’s Bostic (NV, 8:30 a.m. CT), and Chicago’s Evans (NV, 11:40 a.m.).
OTHER ECONOMIC NEWS
Recession Risk Is Rising, Economists Say (WSJ): “Economists see a growing risk of recession as the relentlessly strong U.S. economy whips up inflation, likely bringing a heavy-handed response from the Federal Reserve. … Economists surveyed by The Wall Street Journal this month on average put the probability of the economy being in recession sometime in the next 12 months at 28%, up from 18% in January and just 13% a year ago.” For context, a 28% chance of recession is relatively high historically during non-recessionary periods.
ICYMI – April 8, 2022 Weekly Market Recap: Longer Treasury yields rose rapidly last week as Fed communications strengthened expectations for officials to aggressively tighten policy this year to try and suppress historic inflation pressures. Yields jumped Tuesday after Governor Brainard said in a speech that the Fed “will continue tightening monetary policy methodically through a series of interest rate increases” and noted that she “expect[s] the balance sheet to shrink considerably more rapidly than in the previous recovery,” actions that will “bring the stance of policy to a more neutral position later this year.” Tuesday’s 15.2 bp jump for the 10-year yield in the aftermath of her remarks was the strongest since July 2013, excluding March 2020 volatility and the 2016 Presidential Election. Minutes from the March meeting released Wednesday provided more color, noting that officials were coalescing around a plan to phase in a $95 billion monthly runoff cap – $60 billion in Treasury securities and $35 billion in MBS – over a period of around three months. Between the two events, San Francisco President Daly, maybe the most dovish Fed official, said that uncontrolled inflation is “as harmful as not having a job” and President Bullard from St. Louis called for a year-end fed funds rate of 3.00% to 3.25%. “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,” Bullard added. The 10-year yield has risen nearly 32 bps last week and finished with its strongest four-day jump since 2013, excluding March 2020 and the week of the 2016 election. With the 2-year yield much more anchored, up just 5.5 bps on the week, the spread between the two securities widened notably. After ending with its deepest inversion since 2007 the prior Friday, the key spread steepened by the most in a single week since 2013. Click here to view the full recap.
Global yields are on the rise coming into this morning’s U.S. trading. Leading the way is an 8.8 bps increase in the German 10-year yields to +0.79%. The U.S. 10-year yield rose further after last week’s 32 bps increase, breaching the 2.75% mark overnight for the first time since March 2019. The rise in sovereign yields is weighing on risk sentiment with global equities down. Chinese equities fell 3.1% while Hong Kong’s Hang Seng sank 3.0%. Eurozone stocks are only down 0.5%, but are red across the board. U.S. equity futures are down 0.4% to 1.0% with the Nasdaq leading the way lower.