By Serafino Tobia, Director of Agency CMBS Trading and Portfolio, Greystone
US Treasuries
10-year Treasury yields are higher on the week, 4.46% this morning versus 4.43% as of last Tuesday’s closing level. Yields fluctuated in a 15 basis points range last week (between 4.35% on Wednesday and 4.50% Friday morning, just after the stronger than expected headline Retail Sales). The higher volatility is the result of investors assessing the possibility of higher inflation with the President-elect’s campaign proposals as well as economic data this past week reflecting a healthy economy and a pause in the improvement on inflation.
Last Week’s Economic Data
- Consumer Prices – On Wednesday, October Core CPI (without food and energy prices) printed at +0.3% month-over-month. Core CPI came in as expected but now three months in a row at 0.3%, reflecting a pause in the improvement we will need to get to the Fed’s 2% inflation target. Core CPI for the year printed at 3.3%, also as expected. Headline CPI printed at 0.2% for the month, 2.6% year over year.
- Producer Prices – On Thursday, October Core PPI printed at +-0.3% for the month, versus 0.2% as forecasted and September’s number. Core PPI, year-over-year, printed at 3.1%, also higher than last month’s read of 2.8%. Headline PPI printed at +0.2% for the month, 2.4% year over year.
- Weekly Initial Jobless Claims – Also Thursday, initial unemployment claims printed at +217,000 (lower by 4,000) confirming that the labor market is relatively healthy.
- Retail Sales – On Friday, October Retail Sales posted at +0.4% headline growth for the month, a healthy print and higher than the consensus estimate. September’s print was revised higher to +0.8%. Without auto sales, the print was less than expected.
Fed Policy and Next Fed Funds Rate Cut
The Fed Funds rate is currently at 4.58% with the Fed’s target range at 4.50% - 4.75%. As you know, the Fed reduced the Fed Funds rate by 0.50% at the September FOMC meeting (9/18) and by 0.25% at the November meeting (11/7). The next Fed Funds rate decision will be at the December FOMC meeting (12/18) and the consensus is that the Fed will cut another 0.25%. I only add that the markets are assessing the possibility that the Fed may keep the Fed Funds rate the same at the December meeting. We get a good amount of economic data before then highlighted by the October PCE inflation data at the end of this month (11/27), November CPI inflation on December 11th and another jobs report on Friday December 6th. We’ll see how it goes, but assuming the neutral Fed Funds rate is 3.5% (or now possibly a bit higher), there still is significant room for the Fed to pursue normalizing monetary policy and cut another 0.25% at the December meeting. Thereafter, the markets are expecting the Fed to slow further rate cuts. If we get the quarter point cut in December, based on the shape of the yield curve, the market is implying just another 0.32% in cuts during the first six months of 2025 (4.01% is implied as of 7/1/2025).
My Take on Longer Term Yields
There is a lot of enthusiasm about Trump’s pro-growth policy proposals as evidenced in the stock market, but economic growth spurred by tax cuts doesn’t bode well for interest rates. The reset to a 4.40-handle 10-year yield post-election day reflects investors added concerns about possible inflation with the President-elect’s campaign proposals. Further, the economy and labor market remain healthy and progress on inflation has stalled. Some market commentary suggests we could see 10-year rates continue to move higher, as high as 5%. I’m not that pessimistic, but the big caveat is the new administration’s fiscal policies and tariff proposals. Expect rate volatility to continue as investors front-run and handicap what portion of Trump’s policies will be realized and the impact on economic growth and inflation.
Upcoming Economic Calendar
This coming week we get a good amount of economic data about the underlying economy including housing figures, regional business activity and consumer sentiment (but nothing on inflation or the labor market except for the weekly jobless claims numbers on Thursday). The next inflation print will be the PCE Index, the Fed’s preferred inflation gauge, published the following Wednesday (11/27). Tomorrow, we get public comments from Kansas City Fed President Schmid.
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