By Serafino Tobia, Director of Agency CMBS Trading and Portfolio, Greystone
US Treasuries
You may recall the Wall Street bond market axiom – “Bad news is good news” meaning with weak economic data, interest rates move lower. Well, the corollary is also true, “Good news is bad news” and we got some good news on the economy over the past three weeks. Treasury yields recalibrated higher by some 45 basis points driven in large part by investor thinking that a hard landing recession is now remote after seeing a healthy US employment report for September (10/4); +258,000 new jobs (along with 72,000 upward revisions to August and July job growth) and a tick down in the unemployment rate from 4.2% to 4.1%. 10-year yields at 4%+ also reflect a consumer inflation print (CPI) that is a bit firmer than expected (10/10); month-over-month Core CPI moved higher by 0.3% (+0.312% unrounded), versus the estimate of 0.2%. The 10-year yield is currently at 4.13%;10-year bonds traded in a 10-basis points range (4%-4.10%) over the past two weeks and moved higher this morning with yields higher in Europe overnight.
Last Week’s Economic Data
- Retail Sales (10/17) - This past Thursday, Retail Sales for September printed +0.4% versus 0.3% expected and 0.1% in August. Excluding autos and gas, retail sales were higher by +0.7%, 2x+ the anticipated 0.3%. The Retail Sales Control Group was also higher by +0.7%. This is the largest monthly gain in the Control Group this year. With the Retail Sales print, Treasury yields moved higher by 3-4 basis points across the yield curve on Thursday morning.
- Weekly Initial Jobless Claims (10/17) - Initial Jobless Claims printed at 241,000, a bit lower than last week’s outsized +260k but still elevated; weekly jobless claims averaged +194k for the first 9 months of 2024. The bond market was watching keenly to see if there was further unemployment claims related to Hurricane Helene. Hurricane Milton came in on Wednesday/Thursday of the previous week; the first round of jobless claims will be in this coming Thursday’s report.
Fed Monetary Policy – Next Rate Cut
Recall, back in August (8/23), at the Federal Reserve’s Jackson Hole, WY annual retreat, Fed Chairman Powell pivoted monetary policy - "The time has come for policy to adjust… the direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks." At the September FOMC meeting (9/18), the Fed then moved the overnight Fed Funds rate lower by 0.50%, adjusting the target range for Fed Funds down to 4.75% - 5.00%. Also at the September meeting, we received the Fed’s forecast (Dot Plot survey from the 19 Fed officials) indicating that the Fed expects the Fed Funds rate to be 4.375% by year-end 2024 (another 50 basis points lower over the next 3 months).
With inflation still on a path towards the Fed’s 2% target (but possibly a bit bumpier and slower pace), the Fed likely continues to cut rates to safeguard employment and orchestrate a soft-landing economy. A neutral Fed Funds rate should be about 3-3.50% (2-2.5% inflation rate plus 1% +/-), so the Fed still has some 100 basis points plus to move rates lower. As long as inflation doesn’t reignite, expect a 0.25% cut at the next FOMC meeting (11/7) and another 0.25% at the subsequent FOMC meeting (12/18).
My Take on Longer Term Yields
We had an adjustment higher in 10-year yields by almost 40 basis points after the September employment report and the CPI inflation print two weeks ago. I expect that we are in a trading range at 4.10% +/- 10 basis points until we receive economic data that indicates a further reset of inflation and/or the economy. Big picture, a 4%-4.25% 10-year yield seems about right fundamentally, reflecting a 2-2.5% expected inflation and add-on for a real return and term risk.
The information provided in this email, including, without limitation, any opinions, predictions, forecasts, commentaries or suggestions, is for informational purposes only and should not be construed to be professional or personal investment, financial, legal, tax or other advice.