Insights

US Treasuries

• The 10-year Treasury yield is currently 4.25%, 4 basis points higher this past week. 10-year bonds traded in an 8-basis point range this past week (4.20% to 4.28%).
• 2-year Treasuries are at 3.54% this morning, 4 basis points lower since last Monday morning.
  

Treasury yields moved marginally higher early in the week as market participants waited for the Fed rate decision on Wednesday afternoon - holding rates steady. Friday morning in the overnight session, yields edged to the high end of the range but moderated as the US market opened, despite producer prices (PPI) for December printing higher than expected and Trump’s announcement that Kevin Warsh will be nominated as the next Fed Chairman when Jerome Powell’s term ends in May.

Last Week’s Economic Data (Selected)

This past week’s data shows solid but uneven growth – durable goods and core capital goods improved, jobless claims remained low, housing prices continued to rise, and wholesale inflation (PPI) surprised to the upside. Consumer sentiment and regional surveys were mixed, with manufacturing surveys still largely in contraction but stabilizing, services activity improving, and the Chicago PMI signaling a notable return to expansion.

Hard Data

• Durable Goods Orders (Preliminary): November durable goods orders surged +5.3% versus -2.1% October, as revised. The increase was driven by Boeing aircraft bookings. Excluding transportation, durable goods printed +0.5%, versus +0.1% in October.
• Core Capital Goods Orders (Preliminary): November core capital goods (non-defense, ex aircrafts and parts) improved to +0.7% versus 0.3% October, as revised. Capital goods orders are purchases by businesses to produce goods and services (versus durable goods which are all orders for goods that last 3 years or more, for both consumers and businesses).
• ADP Weekly Employment Change Report: ADP shows 7,750 jobs versus 8,000 the previous week.
• FHFA Housing Price Index: November housing prices printed higher by +0.6% for the month after +0.4% the previous month.
• S&P Cotality 20-City Price Index: According to S&P/Cotalily, housing prices for November printed +0.47% for the month versus +0.36% increase in October, as revised. Year over year, this index increased 1.39%.
• Richmond Fed Business Conditions: January’s business conditions index for this Richmond VA area printed at -6 versus -11 in December; again, still below 0 and in contraction territory.
• Weekly Initial Jobless Claims: Unemployment claims for the week of January 24th came in at 209,000, 1k less than the previous week as revised. New claims remain subdued; the 2025 weekly average was 226k, however new claims are normally light during the period after Thanksgiving to mid-February; this year is no exception.
• Imports and Exports: November imports printed +5% versus – 3% for October, as revised. November Exports were down -3.6% versus +3% for October, as revised.
• Trade Balance: November trade deficit widened sharply to -$56.8 billion (versus October’s -$29.2b, as revised) driven by volatile, tariff-related swings in gold, pharmaceuticals, and computer and semiconductor trade that obscure underlying economic trends. Gold exports fell sharply as prior tariff fears unwound, pharmaceuticals contributed roughly $10 billion to the wider deficit through erratic export and import movements, and computer and semiconductor imports surged to unusually high levels amid tariff uncertainty.
• Producer Prices (PPI): Headline PPI printed +0.5% for the month of December, surprisingly above 0.2% forecast. PPI Core (ex-food and energy prices), printed at +0.7% versus 0.2% expected. For the year, headline PPI printed +3% and PPI Core at 3.3% versus the 2.9% forecast.

Soft Data (Surveys)

• Conference Board Consumer Confidence: January’s survey came in weaker at 84.5 versus 94.2 in December, as revised (1985 = 100). Readings above 100 signal optimism; below 100 signal pessimism.
• Dallas Fed Manufacturing Index: January’s print for this region improved to -1.2 versus December at -11.3 as revised. The region is still in contraction (sub-0) but stabilizing.
• Dallas Fed Services Activity: Services in the Dallas Fed region registered 2.7 for January versus -5.0 in December, as revised. Readings over zero represent an expansion.
• Richmond Fed Manufacturing Index: January’s manufacturing index for this region printed at -6 versus -7 in December; a marginal improvement but still in contraction territory.
• Market News International Chicago Purchaser Managers' Index (PMI) – January’s PMI printed at 54, surprisingly strong versus the 43.7 forecast and the first expansion read (above 50) in the past two years.

Fed Monetary Policy

This past Wednesday, the Fed kept the Fed Funds rate range unchanged at 3.50% - 3.75% - as expected and therefore the market reaction was muted. Two of twelve voting Fed officials dissented (Miran and Waller who both wanted a 25-basis point rate cut). This was not surprising – Miran, President Trump’s appointee last September, dissented at every meeting since then; Waller had hopes that Trump may tap him to replace Powell as Fed chairman.

Fed Chairman Powell Press Conference

During the press conference, Fed Chairman Powell was textbook neutral - referencing the Fed’s dual mandate – full employment and stable prices. Powell pointed out that the FOMC has already cut rates by 1.75% since September 2024 and interest rates now are within a neutral range. Powell commented that the economy is solid and while inflation remains elevated at around 3% (core PCE), it’s driven by tariffs on goods which arguably will be a temporary one-time hit on prices (unless additional tariffs are implemented). Powell also commented that concern over the labor market weakness has reduced as well.

The overnight Fed Funds rate is 3.64% (target range 3.50%-3.75%). As implied by the shape of the yield curve, the bond market anticipates a ¼ point rate cut in June or July and then the possibility of a 2nd ¼ point cut by year-end.

Kevin Warsh as Fed Chairman - The markets are now going to want to hear from Kevin Warsh after Trump’s announcement to nominate him as the next Fed Chairman. Of course, Warsh will be leaning towards lower interest rates (at least initially), a requisite for his nomination by Trump. Interestingly however, Warsh has a history as a Fed governor (2006 – 2011) during the financial crisis in 2008-2010. Warsh was considered an inflation hawk, warning about inflation risks prior to the financial crisis and opposing the Fed’s second round of quantitative easing in late 2010.

My Take on Longer Term Yields

We will need the empirical data to validate the outlook, but if you followed what Powell said at the FOMC presser last Wednesday, services inflation is on track towards the Fed’s 2% target and goods inflation are likely to follow lower once tariff-driven price increases work through the system during the first half of 2026. Subdued inflation prints, combined with Warsh taking responsibility as Fed Chair, will set the stage for 10-year Treasury rates to move towards 4% over the next few months.

Further, let’s not dismiss the possibility that the labor market falters prompting the Fed to move more forcefully on its “full employment” mandate and pulling longer-term yields lower. December’s employment report was mixed – non-farm payroll jobs rose a modest +50k while the unemployment rate improved by 1/10th to 4.4%. With January’s employment data due this Friday, a weaker print would be supportive for rates, whereas a stable or improving labor backdrop should have only a limited negative impact, as a solid labor market is largely embedded in current expectations.

This Coming Week’s Economic Data

“Jobs week” with JOLTS job openings on Tuesday, ADP jobs report Wednesday, weekly jobless claims Thursday and the highlight, January’s print of the US employment report on Friday.