Baker Market Update
2022-10-28

It was another week of volatility as US Treasury yields fell across the curve. Peaking to 4.24% on Monday, the 10 UST Note yield is currently back down below 4% as of Friday morning, making a 25bps round trip over the last couple weeks. Meanwhile, the 2Yr UST Note is currently 4.37% and was up to 4.6% late last week as well as the long bond (30Yr) is hovering around 4.1% which is down from 4.4 since Monday. Yields are slightly higher today with bond prices down this morning with the release of personal spending and income figures along with the Fed’s preferred inflation Personal Consumption Expenditures (PCE). Checking in on the shape of the yield curve, after nearing inversion earlier this week, the spread between the 10-year and 3-month Treasury yields has now moved into negative territory. It currently sits at negative 10 basis points and has been considered a better indicator than the more popular 10s versus 2s spread. All three major equity indices here in the US are currently around 2% higher since Monday open.

On Tuesday, the S&P CoreLogic Case-Shiller index indicated prices fell 0.9% in August, the second consecutive monthly decline following decades of increases. Also related to housing, new home sales fell 10% month over the month in September and are now down 42% from the peak and likely falling in the months ahead. Soaring mortgage rates, plunging demand and a surge in housing inventory will continue downward pressure on this important sector in the economy. On Thursday we saw the first estimate of 3rd quarter GDP showing the economy grew 2.6% in Q3 following two consecutive quarters of negative growth. While the 2.6% figure looks impressive, a lot of the growth can be attributed to the 2.8% boost in net external trade. Personal consumption, which is approximately 70% of GDP slowed to 1.4% from 2.0% in Q2. Today, US Income and Spending data was released as well as the Employment Cost Index. Personal income was on target with a 0.4% increase and spending rose 0.6% up from an estimated 0.4% increase now showing the savings rate dropping to 3.1% the lowest since 2008. The Employment Cost Index was up 1.2% from 1.3% prior month. The PCE Deflator, The Fed’s preferred measure of inflation rose 0.3% making the YoY 6.2%.

It will be an action-packed week as economic data and central bank meetings hope to clear up some of the uncertainty currently embedded in the financial markets. Manufacturing and Services PMI data will be highly anticipated for the first look at Q4 performance in the US and abroad. Surveys are signaling a slowdown in both releases. Mid-week the Federal Reserve Open Market Committee (FOMC) will meet and are widely expected to increase short-term interest rates another 75bps taking the Fed Funds Rate up to 4%. This meeting will not include the release of their Summary of Economic Projections (SEP). Outside the US, other Central Bank meetings will occur in the UK, Norway, Australia, and Maylasia and Eurozone Q3 GDP will be released along with their CPI figures for October. On Friday, we will get the monthly US jobs report for October which is showing 200K for non-farm payrolls (another down shift from 263K in September) and the unemployment rate edging up slightly to 3.6%, from 3.5%.

Happy Halloween

10Yr-3Mo US Treasury Yield Curve Spread