This week proved to be a calm week in the bond market as yields across the curve remained relatively flat. The 10yr sits at 3.56% and within 5 basis points of the start of the week. The Fed has remained steadfast in their plan to raise short-term rates, but bond investors have actually seen yields on the 10yr fall -68bps from the highs in Oct. ’22. It may still be too soon to call a peak in yields, but for investors who feel they have missed an opportunity, it’s important to note that you’d have to go all the way back to April of 2011 to see bond yields at current levels.
As for economic updates, we kicked off the week with a look at Housing Starts and Building Permits, both of which came in softer than February’s numbers at -0.8% MoM and -8.8% MoM respectively. Starts and Permits are strong leading indicators for future housing growth and continue to remain subdued by higher mortgage rates. Speaking of Leading Indicators, we also got a look at the LEI which fell -1.2% from last month and the 6mo annualized number is now down -8.8%. We have all heard that “correlation does not equal causation”, but this another data point that has never been this negative outside of a recession and suggests the “soft-landing” could be a little firmer than we would like.
This week’s economic release did have a bright spot as the Empire Manufacturing index surprised to the upside and expanded for the first time in 5 months, but noted that factory headcount declined for the third month in a row. Additionally, Continuing Jobless Claims have been slowly trending up since the lows in September to 1.865mm.
Looking ahead to next week, is the first look at Q1 GDP along with the University of Michigan’s Consumer Sentiment Report. And, just in time for the Fed’s May 3rd meeting, we will also get a look at their preferred measure of inflation, the PCE Index. We will see where the inflation data leads us as the Fed remains hyper-focused on returning to long-term price stability, but the current CME FedWatch tool is showing a strong 88% probability of a 0.25% rate hike to the 500-525 range. The Fed Funds Futures market is currently betting that this will be the last rate hike we see from the Fed before they pause, but as ever, this will be data dependent and the picture only gets clearer with time.
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