By Serafino Tobia, Director of Agency CMBS Trading and Portfolio, Greystone
US Treasuries
The 10-year Treasury yield moved substantially higher this past week, from 4.18% last Monday morning (12/9) to 4.37% as of this morning (after closing at 4.40% on Friday). That’s a big move without a specific catalyst that caused the spike. It seems investors are concerned that the November CPI and PPI data last week showed persistent sticky inflation (with some of the inflation data higher than the consensus estimate). Last Wednesday morning, yields ticked lower initially after the CPI data based on the notion that (i) we didn’t get an upside-surprise and (ii) the data won’t stop the Fed from cutting the Fed Funds rate by 0.25% this Wednesday (12/18). Yields, however, turned higher and climbed steadily through the rest of the week (despite weaker than expected weekly unemployment claims on Thursday). Arguably, bond traders and investors dismissed the weekly jobless claims (as just a single weekly data post) and focused on the inflation prints, which are not sustainable. If the Fed is intent on getting to a 2% inflation rate, high prints will likely result in the Fed slowing the Fed Funds rate cuts next year.
Last Week’s Economic Data
- Consumer Prices – November Headline CPI printed at 0.3% for the month, 2.7% year over year. Core CPI (without food and energy prices) printed at +0.3% month-over-month. Core CPI came in as expected but now four months in a row at 0.3%, reflecting a pause and possibly persistent inflation. Core CPI for the year printed at 3.3%, also as expected.
- Producer Prices – November Headline PPI printed at +0.4% for the month versus the 0.2% estimate, +3% year-over-year versus the estimate of 2.6%. The PPI prints are concerning; 3% is a +0.6% increase versus last month’s print at 2.4%. Core PPI printed at +-0.2% for the month, as forecasted. Core PPI, year-over-year, printed at 3.4%, unchanged from last month’s read (as revised).
- Weekly Initial Jobless Claims – Also Thursday, initial unemployment claims printed at +242,000 (significantly higher than the 220k consensus estimate and approaching a level where the markets get concerned about the health of the labor market). The higher weekly jobless claims is certainly something to watch, however, it’s probably best to look at weekly claims on a 4-week average, +224,300.
- Import Prices – On Friday, import prices printed an increase of +0.1%, lower than last month’s +0.3% level but higher than the consensus estimate of -0.2%.
Fed Policy and Next Fed Funds Rate Cut
The overnight Fed Funds rate is currently pegged at 4.58% with the Fed’s target range at 4.50% - 4.75%. The Federal Reserve FOMC meets tomorrow and Wednesday with a rate announcement on Wednesday 2pm ET followed by Fed Chairman Powell’s press conference at 2:30pm ET. The bond market is expecting a 0.25% cut in the overnight Fed Funds rate (new Target Range 4.25% - 4.50%). The FMOC will also release a new Dot Plot (survey of the 19 Fed officials) revising where they anticipate the Fed Funds rate to be by year-end 2025 and 2026. Recall at the September meeting, the FOMC Dot Plot had forecasted the Fed Funds rate to be 4.375% by year-end 2024 (looks like we will be on target with a 0.25% cut on Wednesday), and then another 1% in rate cuts next year.
Go Deeper: There is a good article in today's Wall Street Journal regarding the shifting sentiments of Fed officials.
We will see how the Fed’s new Dot Plot survey looks on Wednesday; with the persistent inflation prints, the markets are now expecting a slower pace of rate cuts in 2025. The yield curve implies that the Fed will cut 0.25% on Wednesday and another 0.63% in cuts over the course of the year in 2025.
My Take on Longer Term Yields
10-year yield over the past month and a half has established a range between 4.50% (11/15) and 4.13% (12/6). On the high-end, I would expect demand for Treasuries to kick in and yields to hold to a 4.40-handle. With inflation remaining sticky, I would expect 10-year yields to trade in a 15-basis point range reflecting fundamental value (inflation at 2.50% +/- as measured by the PCE index plus spread for a real return and term risk). We will need to see improvement with inflation data or softer labor data for yields to move closer to 4%.
Upcoming Economic Calendar
The focus this week will be on the Fed FOMC meeting and rate decision on Wednesday. Beyond a ¼ point rate cut, the market participants will put attention to the Dot Plot and Fed Chairman Powell’s press conference for indication of the pace of rate cuts in 2025.
On the data front, we will get the November PCE inflation index (Friday) as well as retail sales and consumer spending numbers. Wall Street economists forecast for the PCE index to post +0.2% for both headline and core for the month. Year-over-year, headline PCE is expected at 2.5% (versus 2.3% as of last month) and Core PCE at 2.9% (versus 2.8% last month).
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