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Baker Market Update

Ferris Bueller once famously said, “Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it”. This quote feels appropriate this week when watching the strong rally in the Treasury market that has occurred. In just under 60 days, the 10-Year Treasury yield has fallen by more than 100 basis points. Just this week, the 10-Year Treasury yield has fallen over 30 basis points. This morning the 10-Year Treasury bond is yielding 3.91% with the 2-Year Treasury yielding 4.40%. Here is your week in review!

All eyes were on the last Fed meeting of 2023 which concluded Wednesday with the Fed leaving rates unchanged. This is the third consecutive “pause” from the Fed. Fed Chairman Powell continued to dance around questions asking about potential rate cuts early next year. He refused to even say the words, “rate cuts”. Instead, he said they may soon begin to talk about “dialing back policy accommodation”. These words seemed to be all the market needed to hear to spark the strong treasury rally. An updated Fed Dot Plot was released Wednesday with the median dot lowered by 50bp to 4.5-4.75% from 5-5.25% in September implying 75bp of rate cuts next year. Additionally, several of the higher dots in 2025 and beyond have now lowered towards the consensus implying less influence of the “higher for longer caucus” within the FOMC. This morning, the Fed Funds futures market is calculating a 75% rate cut at the March 2024 meeting.

On Tuesday, the Consumer Price Index (CPI) rose 0.1% in November, slightly higher than expectations for no change, while Core CPI rose 0.3% vs expectations for 0.2%. Compared to a year ago, CPI rose 3.1% and Core CPI rose 4.0%, both in-line with expectations. There were big declines in energy prices, especially gasoline, and smaller declines in apparel, commodities, and new cars. The closely watched shelter component rose from the prior month despite the moderation in house prices and the continued decline in national rents. The so-called “Supercore” (core services less housing), also ticked up slightly to 3.9%, which is only the second acceleration for this component this year.

Wednesday morning the BLS reported this morning that wholesale prices rose less than expected in November as inflation continues to trend lower towards the Fed’s target of 2%. PPI was unchanged in November (est = 0.0%) and up just 0.9% from a year ago (est = 1.0%). Excluding food and energy, Core CPI was also unchanged (est = 0.2%) and up 2.0% from a year ago (est = 2.2%). While PPI is less important to the Fed and does not normally move markets, wholesale inflation does tend to lead consumer inflation as the cost of inputs eventually feed into the final product or service.

Thursday’s release of retail sales data for the month of November was surprisingly strong. Retail sales grew 0.3% in November with economists expecting a 0.1% decline. November retail sales excluding auto and gas increased by 0.6% compared to estimates for a 0.2% decrease.

Next week’s economic releases include data on building permits, housing starts, and existing home sales. We will wrap up next week with updated releases on personal income and personal spending as well as inflation data from the Personal Consumption Expenditures index.

This weekend kicks off the start of College Football Bowl Season! There are over 40 bowl games to enjoy this holiday season, including some of my favorites such as the Boca Raton Bowl and the Tony the Tiger Sun Bowl! Have a great weekend!

Fed Funds Rate, 2-Year Treasury Yield and 10-Year Treasury Yield
(2004 to Present)

Source: Bloomberg, L.P

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Since 1979, we’ve helped our clients improve decision-making, manage interest rate risk, and maximize investment portfolio performance. Our proven approach of total resource integration utilizes software and products developed by Baker’s Software Solutions* combined with the firm’s investment experience and advice.



Dale Sheller
Associate Partner
Director of Financial Strategies Group
The Baker Group LP

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