Market Analytics and Technical Considerations
Key Points
Bond traders are wagering that the relatively long direction for interest rates will be lower even if the Federal Reserve is still actively boosting its policy rate in anticipation of a US recession.
Source: Bloomberg
The Fed’s current daily benchmark band for long-term Treasury rates is presently 3.75% to 4%, and there remains one more percentage point of central bank raising rates priced in for the upcoming months. The options market has also shown activity, which may indicate that some investors are hedging against the possibility that policy rates could eventually decrease by half from their existing price.
Investors have been buying bonds instead of waiting for clear economic proof that this year’s frantic monetary tightening will result in contractionary situations in 2023; this position has been supported, among others, by Pacific Investment Management Co.
Gregory Faranello, head of US rates trading and strategy at AmeriVet Securities, stated that the Fed’s policy is dynamic and that they are still indicating that rates would rise. “However, the market behaves as though the Fed reaching its goal is more comforting for it.
This week, demand for longer-term Treasuries pushed the rates on 10- and 30-year notes to the lower limit of the Fed’s overnight band. The most dramatic yield curve inversion in four decades has intensified as a result of front-end rates remaining largely stable; this is a closely studied sign of probable future economic suffering.
Although the argument for recession indicators is compelling, Faranello noted that the Fed views them as a component of the remedy.
The US economy, and the job market in particular, has demonstrated itself to be rather resilient thus far in the face of Fed rate rises intended to try to limit rising and presumably persistent inflation. Investors will therefore be closely watching the monthly employment report this upcoming Friday for any hints of a slowdown or if it may open the door for the Fed to alter its current course of action.
They will be closely examining the statements made by Fed Chair Jerome Powell and his colleagues, who will appear in public for the final time next week before entering the normal blackout period leading up to the Fed’s plenary session on December 13–14. Officials have been adamant in repeating the necessity for policy rates to rise above present levels, even if minutes of their most recent conference indicated that they’re likely to decrease the pace of tightening soon.
Given that expectations of a gradual slowing of policy tightening from here amid a perception that inflation has crested and job employment growth is slowing, Fed jawboning may prove less effective than the tone of data at this stage of the cycle.
As traders negotiate a number of important data in the upcoming week, not just the employment report, there may be some turbulence for Treasuries due to the extent of current bullishness in the long end of the bond market and the depth of the yield curve inversion. The ISM manufacturing index is expected to decline, which may help wagers on a recession, and the personal income and spending data will reveal how things are changing for personal consumption expenditure, the Fed’s preferred inflation indicator. Additionally scheduled for distribution are statistics on the number of open positions.
According to swap-market projections, the effective fed funds rate will increase to almost 5% by the middle of the coming year before declining by more than 0.5 percentage points by the beginning of 2024. The week’s trading in Assured Overnight Financing Rate futures, however, have been centered on the likelihood of a decrease to 3% or even 2% by the 2023 end or early 2024. However, some are banking on a considerably sharper reverse.
Despite this, not everyone agrees with the consensus on the bond market on the Fed, the economy, and, of course, the inevitable return of low inflation in 2019. The 10-year will continue to trade around 4% through 2024, according to Goldman Sachs Group Inc., which stated this week that hopes for rate cuts after this year have been crushed by the economy’s failure to enter a recession and the high level of inflation.
However, that is not the primary viewpoint. Market pricing indicates that many investors are steadily shifting their focus away from the prospect of constant Fed rises and toward a potential economic slowdown, even if the Fed itself has not yet changed its policy.
What to See
The Dallas Fed manufacturing activity index is due on November 28.
Conference Board consumer confidence; FHFA house price index as of November 29.
On November 30, the following data points will be released: ADP employment, MBA mortgage applications, third-quarter gross domestic product, advance goods trade balance, wholesale and retail inventories, MNI Chicago purchasing managers index, pending home sales, JOLTS job openings, and Fed beige book.
Dec. 1: Weekly unemployment claims; ISM manufacturing; Personal Consumption Expenditures (PCE) report
Monthly jobs report, December
Fed’s Event’s calender
Nov. 28: James Bullard of the St. Louis Fed and John Williams of the New York Fed
Nov. 30: Jerome Powell as chair; Lisa Cook and Michelle Bowman as governors
Dec. 1: Lorie Logan of the Dallas Federal Reserve, Bowman, and Vice Chair for Supervision Michael Barr
Charles Evans of the Chicago Fed, December 2
Auction schedule:
28 November: Bills for 13 and 26 weeks
29 November: 52-week bills
30 November: 17-week bills
December 1: 4- and 8-week bills
