Market Watch | Baker Market Update

Baker Market Update

Our BMU is designed to keep you abreast of changing market conditions and the variables that drive those changes.

Baker Market Update – Week in Review

Released every Friday, BMU is a brief and informative newsletter that provides financial institutions a review of the week’s economic developments, tracks Federal Reserve policy, and provides an overview of the week’s expected data releases.

Below are the most recent Baker Market Update additions.

Sample View

Baker Market Update – wk211126

Wow. The week of Thanksgiving is normally sedate for financial markets, and traditionally the day after Thanksgiving is the single lowest volume day of the year. This year is quite different. In the last five active sessions, bond yields have ranged from an intraday low of 1.50% to a high 1.69% and now sit at 1.49%. There were some noteworthy news items this week to be sure, but a sudden and convulsive change in sentiment was driven by rising COVID caseloads and a new strain of the virus which has frightened markets and raised questions about the path forward for global economic conditions.

The data stream was light this week. Existing home sales rose a touch higher than expected, and initial jobless claims continued to improve. More interesting was the November FOMC minutes which revealed that policymakers generally still believe inflation is likely to be transitory but now expect the transition to take longer than previously expected. An understatement I’d say. Regarding the taper announcement, the minutes said “some participants suggested that reducing the pace of net asset purchases by more than $15 billion each month could be warranted.” This would allow them to move faster on the funds rate in light of stubbornly high inflation. Market expectations of a more aggressive Fed were immediately adjusted. Notably, the yield curve (10yr minus 2yr) has flattened by 30bps in less than two months.

Also, President Biden announced this week he would nominate Jerome Powell for a second term as Fed Chair which was not unexpected. He simultaneously announced the appointment of Lael Brainard as Vice Chair of the Board. Powell and Brainard hold similar views on the conduct of monetary policy, but Brainard is seen as having a greater inclination toward active regulation. There remain three vacant seats on the board and we may get nominations in the coming month.

The thing that’s really moving markets this week, however, is the realization that COVID is again rising as a threat, and a virulent new strain is suddenly front and center. We’ve learned not to take this lightly. This new strain has reportedly already popped up in Hong Kong and Israel, and it’s too early to know whether and to what degree current vaccines provide protection. The Europeans among others are already re-imposing lockdowns. It’s important to remember that it is the restrictions imposed in response to the virus rather than the virus itself that causes damage to the economy and financial markets. Time will tell, but for now the US Treasury market is seeing a powerful rally as scared money flows to the safe haven.

US Treasury Yield Curve Slope: 2yr vs 10Yr

The Baker Group is one of the nation’s largest independently owned securities firms specializing in investment portfolio management for community financial institutions.

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.

*The Baker Group LP is the sole authorized distributor for the products and services developed and provided by The Baker Group Software Solutions, Inc.

For More Information

Jeffrey F. Caughron

President and Chief Executive Officer
The Baker Group LP

jcaughron@GoBaker.com
800.937.2257

INTENDED FOR USE BY INSTITUTIONAL INVESTORS ONLY. Any data provided herein is for informational purposes only and is intended solely for the private use of the reader. Although information contained herein is believed to be from reliable sources, The Baker Group LP does not guarantee its completeness or accuracy. Opinions constitute our judgment and are subject to change without notice. The instruments and strategies discussed here may fluctuate in price or value and may not be suitable for all investors; any doubt should be discussed with a Baker representative. Past performance is not indicative of future results. Changes in rates may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

Baker Market Update – wk211119

The US Treasury market saw a rebound this week with yields drifting slightly lower across the curve. After some upward pressure from last week’s 30yr high on headline inflation print (CPI=6.2%) rates settled back down approximately 5 to 10 basis points as the market continues to digest recent economic data as well as the timing of the Federal Open Market Committee’s first-rate hike since 2018. After peaking at 1.70% about a month ago, the 10Yr Treasury yield currently sits at 1.54%. Equities markets saw small increases as the S&P 500 continues to notch all-time highs and oil fell off a little bit down from $80 to $76 with a recent high of $84.65 late October.

On Tuesday, the October US Retail Sales report was released, indicating strong results. The release showed a 1.7% month over month increase which was the biggest in increase retail spending since March and the third straight month of increases. The broad gain in spending continues to illustrate that elevated savings and rising wages have helped Americans continue to purchase merchandise and anchor economic growth. Also released on Tuesday was Industrial production showing a 1.6% month over month increase further reinforcing that economic activity is strengthening. However rising inflation starting to flow into consumer sentiment and could be a headwind to these figures in the coming months.

It was a busy week in Washington. On Monday, President Biden signed the $1 trillion dollar bi-partisan infrastructure bill into law. Next on his agenda is the $1.64 trillion economic plan which saw the non-partisan Congressional Budget Office (CBO) indicate it would add $367 billion to the Federal Budget deficit over the next decade. In spite of the data from the CBO and the eight and half hour-long speech by House Minority Leader Kevin McCarthy the bill passed the House and is expected to be voted in the Senate early December.

Turing to the Federal Reserve, it is becoming apparent that Chairman Powell’s path to reappointment is not a certainty given the current landscape. Recent activity in betting markets is indicating about a 60% chance of Senate confirmation while current Federal Reserve Board Governor Lael Brainard is approximately 40%. Democratic Senator Joe Manchin has spoken to or plans to talk with both candidates and provide his feedback to President Biden. Senate Banking Chairman Sherrod Brown said this week that either candidate President Biden should elect will have a smooth approval process within the Senate.

Next week there are a few of data points to watch with the shortened Thanksgiving holiday week. Durable goods orders are expected to decline slightly due to a drop in the more volatile items in the headline figure (aircrafts). Personal income and spending data for October will also come out which are expected to show lower nominal incomes given the recent inflation increases. The FOMC minutes from their November meeting will be released and investors will look into the dovish tone and continued use of “largely transitory” with the inflation language.

It is looking very likely that inflation will remain elevated out until early next year. While it is not clear on the short-term impact to growth, typically it will boost growth short term before dragging on it on a long-term basis.

Chart from Bloomberg Economics

The Baker Group is one of the nation’s largest independently owned securities firms specializing in investment portfolio management for community financial institutions.

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.

*The Baker Group LP is the sole authorized distributor for the products and services developed and provided by The Baker Group Software Solutions, Inc.

For More Information
The Baker Group Matt Harris, CFA

Matt Harris, CFA

Senior Vice President/Assistant Director of Asset/Liability Management
The Baker Group LP

mharris@GoBaker.com
800.937.2257

INTENDED FOR USE BY INSTITUTIONAL INVESTORS ONLY. Any data provided herein is for informational purposes only and is intended solely for the private use of the reader. Although information contained herein is believed to be from reliable sources, The Baker Group LP does not guarantee its completeness or accuracy. Opinions constitute our judgment and are subject to change without notice. The instruments and strategies discussed here may fluctuate in price or value and may not be suitable for all investors; any doubt should be discussed with a Baker representative. Past performance is not indicative of future results. Changes in rates may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

Baker Market Update – wk211112

Happy Friday wherever you may be reading this today! Veteran’s Day was yesterday, but I wanted to start off by saying Happy Veteran’s Day and we thank you for your service. This week’s economic calendar release was rather light, given the fact that no economic releases came out yesterday during the holiday. The major market moving news this week was the latest Consumer Price Index (CPI) release for the month of October. The higher-than-expected increase in CPI had markets once again questioning whether or not inflation is or will be transitory as the Fed continues to preach. Equity and bond markets sold off Wednesday as investors digested the higher inflation numbers and their potential impact on the global economy.

Let’s take a look into the details of this week’s CPI release. The CPI increased in October by 6.2% from a year ago. The core price index, which excludes food and energy, climbed 4.6%, up from September’s 4% rise and the largest increase since 1991. On a monthly basis, CPI increased a seasonally adjusted 0.9% in October versus an expectation of 0.6%, and a sharp acceleration from September’s 0.4% rise. Core CPI was up 0.6% for the month of October versus an expected 0.4% increase. Used vehicle prices again were a big contributor, rising 2.5% on the month and 26.4% for the year. New vehicle prices were up 1.4% and 9.8% respectively.

This morning brought updated JOLTS report as well as the preliminary University of Michigan Consumer Sentiment Index. U.S. job openings edged lower in September at 10.4 million job openings but remained well above pre-pandemic levels as employers continue to struggle to find workers. Additionally, the level of people quitting their jobs increased by 164,000 to 4.4 million, a record high. The preliminary estimate of the University of Michigan Consumer Sentiment index released this morning fell to 66.8 in November from 71.7 in October. Americans’ sentiment worsened due to escalating inflation despite a reduction in COVID cases across the nation.

Bond and equity market activity this morning is rather muted after the volatility we saw earlier in the week. The Dow Jones Industrial Average is up 35 points in early trading. The 10-Year Treasury Yield is hovering around 1.55% with the 30-Year Long Bond Yield at 1.93%.

Next week’s economic release calendar brings us monthly retail sales, industrial production and capacity utilization and housing starts. Until next time… have a great weekend!

Consumer-price Index, percent change from a year ago (1990 to Present)

The Baker Group is one of the nation’s largest independently owned securities firms specializing in investment portfolio management for community financial institutions.

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.

*The Baker Group LP is the sole authorized distributor for the products and services developed and provided by The Baker Group Software Solutions, Inc.

For More Information

Dale Sheller

Senior Vice President
Financial Strategies Group
The Baker Group LP

dsheller@GoBaker.com
800.937.2257

INTENDED FOR USE BY INSTITUTIONAL INVESTORS ONLY. Any data provided herein is for informational purposes only and is intended solely for the private use of the reader. Although information contained herein is believed to be from reliable sources, The Baker Group LP does not guarantee its completeness or accuracy. Opinions constitute our judgment and are subject to change without notice. The instruments and strategies discussed here may fluctuate in price or value and may not be suitable for all investors; any doubt should be discussed with a Baker representative. Past performance is not indicative of future results. Changes in rates may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

Baker Market Update – wk211105

If you were to ask anyone what would happen to bond yields if it was reported in a single week that the stock market hit another record high, the economy added more than 500,000 jobs and the Federal Reserve announced they would immediately begin buying $15 billion fewer bonds a month, they would almost surely say yields would spike higher. And yet those three things all happened this week and yields fell 0-7bp across the curve with the largest declines coming in the belly of the curve.

The most anticipated news of the week was the Federal Reserve’s announcement Tuesday that they would begin to taper their asset purchases this month and buy $10b fewer Treasuries each month and $5b fewer Agency MBS. If they maintain that pace of tapering, the Fed should complete its fourth round of quantitative easing in June 2022 with a balance sheet close to $9 trillion. Chairman Powell has done a much better job communicating the impending taper than Chairman Bernanke did back in 2013 when he spooked the markets and caused the 10yr yield to nearly double in 4 months. Markets were well prepared for this announcement and both Treasury yields and MBS prices barely reacted to the news.

The second most important news of the week was Friday’s jobs report that showed the economy added 531,000 jobs in October, the fastest pace in 3 months and more than double the originally reported 194k reported last month (revised higher to 312k). Job gains were led by leisure and hospitality (+164k), but there was broad based strength in business services (+100k), manufacturing (+60k) and transportation (+54k), indicating some of the pandemic related constraints on the economy may be easing. The Unemployment Rate also fell a larger than expected 0.2% to 4.6% and the Labor Force Participation Rate unexpectedly fell to 61.6% as the stronger jobs market seems to have done little to bring idle workers back into the labor force.

While all this positive economic news should have sent bond yields higher, just the opposite happened. The markets were already digesting the news that the Bank of England did not raise rates as expected Thursday but instead left rates at record lows. UK bond yields had risen noticeably in anticipation of that rate hike and quickly reversed course when it did not happen. US bond markets seem to have taken notice and may be questioning the 30bp rise in the 2yr yield over the last month. Markets are now less optimistic about an early Fed liftoff than before and continue to price in a Fed Funds rate around 1.25% in 2025, about half of what the Fed’s most recent “dot plot” shows (see image below).

The Baker Group is one of the nation’s largest independently owned securities firms specializing in investment portfolio management for community financial institutions.

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.

*The Baker Group LP is the sole authorized distributor for the products and services developed and provided by The Baker Group Software Solutions, Inc.

For More Information
The Baker Group's Ryan Hayhurst

Ryan W. Hayhurst

Manager/Financial Strategies Group
Managing Director/The Baker Group LP

ryan@GoBaker.com
800.937.2257

INTENDED FOR USE BY INSTITUTIONAL INVESTORS ONLY. Any data provided herein is for informational purposes only and is intended solely for the private use of the reader. Although information contained herein is believed to be from reliable sources, The Baker Group LP does not guarantee its completeness or accuracy. Opinions constitute our judgment and are subject to change without notice. The instruments and strategies discussed here may fluctuate in price or value and may not be suitable for all investors; any doubt should be discussed with a Baker representative. Past performance is not indicative of future results. Changes in rates may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

Baker Market Update – wk211029

The bond market is scared. Spooked by something that’s caused a creepy inversion in the long end of the yield curve just as the Fed is preparing to begin “tapering” the size of its asset purchases. Instead of a curve-steepening tantrum a la 2013, we’re seeing an eerie flattening that has narrowed the yield spread between 2yr and 10yr Treasuries to just 107bps. That’s a collapse of 20bps in the last nine days and 30bps in less than a month. It would seem from this bond market reaction that the Fed does face an “Impossible Task” as described by Dr. Gary Shilling among others. That is to say they risk moving too quickly in removing stimulus and tapping the brakes on the economy, potentially triggering a frightening slowdown in the economy before we’re even recovered from the whole COVID nightmare. The fear was reinforced by a less-than stellar GDP report for the third quarter which showed only 2% annualized growth, well below the 2.6% consensus expectation.

Despite the fright, this week’s economic data was generally benign or slightly positive. The housing market sure hasn’t been scared as home price appreciation over the last year was up nearly 20% according to the Case-Shiller report. Consumer confidence improved last month as did core capital goods orders and jobless claims. New home sales were higher than anticipated, though still down for the year. The threat of inflation, to be sure, remains terrifying to many. That was reinforced by a jump in the Employment Cost Index which includes all forms of compensation and benefits. That number for the third quarter was up 1.3% versus an expected .9%, and up 3.7% for the year… the highest level since 2004. Another inflation measure, the PCE core deflator, came in at 3.6% YOY, less than expected but an uptick from the prior month. The Fed projects a final inflation reading of 3.7% for all of 2021, and a pullback to 2.3% next year. Transitory, episodic… whatever you think it is, it’s downright chilling right now.

So next week, after some tricks and treats, we’ll welcome the arrival of November. With that comes data on construction spending, manufacturing, factory orders, and the all-important jobs report for October. Let’s hope next month’s price action in bonds is less scary and the employment report doesn’t turn out to be a Turkey.

US Employment Cost Index: 2004 – Today

The Baker Group is one of the nation’s largest independently owned securities firms specializing in investment portfolio management for community financial institutions.

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.

*The Baker Group LP is the sole authorized distributor for the products and services developed and provided by The Baker Group Software Solutions, Inc.

For More Information

Jeffrey F. Caughron

President and Chief Executive Officer
The Baker Group LP

jcaughron@GoBaker.com
800.937.2257

INTENDED FOR USE BY INSTITUTIONAL INVESTORS ONLY. Any data provided herein is for informational purposes only and is intended solely for the private use of the reader. Although information contained herein is believed to be from reliable sources, The Baker Group LP does not guarantee its completeness or accuracy. Opinions constitute our judgment and are subject to change without notice. The instruments and strategies discussed here may fluctuate in price or value and may not be suitable for all investors; any doubt should be discussed with a Baker representative. Past performance is not indicative of future results. Changes in rates may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

Baker Market Update – wk211022

This has been a week of highs. Stock prices hit a record high on Thursday and is now up more than 100% since the March 2020 low. Bitcoin hit a record high near $67,000, up more than 100% in just the last 3 months. The price of crude oil hit $83.37, the highest level since 2014 and up 130% in the last year. Surprisingly, all these recent or record highs came in a week of relatively weak economic data. Industrial Production unexpectedly fell 1.3% in September as supply chain issues continue to constrain the manufacturing sector. Housing Starts and Building Permits both fell more than expected in September with the latter down 7.7% in a sign the red-hot home building market may be starting to cool. Not coincidentally, the Mortgage Bankers Association reported Wednesday that mortgage applications fell 6% as surging mortgage rates have pushed refinance activity down 24% since August. But despite the bad news for Housing Starts, Existing Home Sales rose a stronger than anticipated 7% in September suggesting record high house prices and rising mortgage rates have not been enough to deter buyers yet.

A much more important recent high this week was the high in Treasury yields. The 10-year Treasury yield hit 1.70%, the highest level since March and up 53bp since the August low of 1.17%. Even more important for institutional portfolio managers that tend to purchase more bonds in the “belly” of the curve, the 5-year Treasury yield hit 1.24%, the highest level since March 2020 and nearly double the August low of 0.64%. This is very good news for institutions that continue to hold near record amounts of excess liquidity and are looking for opportunities to invest. The yield pickup moving funds out of Federal Reserve balances and into the 5-year Treasury is now more than 100bp, the highest yield pickup in more than 3 years.

We’ll get a much better read on the economy next week with reports on New Home Sales, Durable Goods, Personal Income & Spending, PCE Inflation and GDP. Estimates for 3rd Quarter GDP has been falling steadily over the last several months with economists forecasting 2.4% growth while the Atlanta Fed’s GDPNow model estimating just 0.5% growth in Q3 (see chart below).

The Baker Group is one of the nation’s largest independently owned securities firms specializing in investment portfolio management for community financial institutions.

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.

*The Baker Group LP is the sole authorized distributor for the products and services developed and provided by The Baker Group Software Solutions, Inc.

For More Information
The Baker Group's Ryan Hayhurst

Ryan W. Hayhurst

Manager/Financial Strategies Group
Managing Director/The Baker Group LP

ryan@GoBaker.com
800.937.2257

INTENDED FOR USE BY INSTITUTIONAL INVESTORS ONLY. Any data provided herein is for informational purposes only and is intended solely for the private use of the reader. Although information contained herein is believed to be from reliable sources, The Baker Group LP does not guarantee its completeness or accuracy. Opinions constitute our judgment and are subject to change without notice. The instruments and strategies discussed here may fluctuate in price or value and may not be suitable for all investors; any doubt should be discussed with a Baker representative. Past performance is not indicative of future results. Changes in rates may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

Baker Market Update – wk211015

After three weeks of drifting higher, treasury yields were largely unchanged given the shortened holiday week. UST maturities five years and longer all saw flat or slightly lower yields and were effectively range bound within 5 to 10 basis points. The two-year part of the curve edged higher five basis points is currently sitting at 38bps. Meanwhile US equities should finish the week higher as all three major indices saw rallied this week. The economic calendar was plentiful as key reports for inflation and jobs were released along with the FOMC’s Minutes from their September meeting.

Looking at the labor markets, on Tuesday the monthly JOLTS report (Job Opening and Labor Turnover survey) was released, indicating that US job openings continue to remain at record highs (11mm) albeit a slight decline in August (10.4mm). More people continue to voluntarily leave their jobs as the quit rate is currently at a record high of 2.9%. Recent wage increases as well as other sign-on incentives are creating more turnover. This trend continues to illustrate the mismatch between the supply of labor versus demand in the economy. For example, for every unemployed American there are currently 1.2 job openings. On Thursday weekly Initial Jobless claims fell to the lowest level since March of 2020 as employers continue to retain workers in a competitive labor market. Still, the September payrolls report released last week was the slowest month of job creation this year (194k) unfortunately as the end of pandemic unemployment benefits and school year beginning did not lead to any significant increases in hiring. The unemployment rate currently stands at 4.8% as the labor force participation remained depressed from people leaving the labor force due to the pandemic. The Fed’s long run goal of eventually returning to pre-pandemic levels of approximately 3.5% which is not expected to occur until 2023.

Turning to inflation, the headline Consumer Price Index (CPI) released on Wednesday indicated further price pressures in the economy as it came in above analyst expectations. The month-over-month headline rate increased 0.4% and the year-over-year increased to 5.4% matching the largest annual gain since 2008. When stripping out the more volatile items such as food and energy, core inflation increased 0.2% and 4.0% (M-O-M/Y-O-Y). The current shipping and transportation challenges, higher commodity prices and rising wages continue to drive these factors. The report will reinforce the Fed’s aim to soon start it’s tapering of asset purchases which is likely to be around $15 billion per month ($10 UST / $5 Agency MBS). Given those taper expectations that would put the $120 billion monthly purchase program down to zero at some point later next year.

Retail sales were released Friday and unexpectedly increased last month in a broad advance as strong demand remains for merchandise in spite of recent supply chain challenges. Retail sales advanced 0.7%, much stronger than the 0.2% estimated drop by economics. This figure will wrap a quarter in which consumer spending will likely slow from the second quarter (12%) as the fourth quarter will be key as the holiday season approaches.

Next week’s is fairly light looking at the economic calendar. Key releases for next week will be the Building Permits on Tuesday, Crude Oil Inventories on Wednesday and Existing Home Sales and the Philadelphia Fed Manufacturing Index on Thursday.

Transitory or not transitory, that is the question. Fed officials remain in a challenging position as price pressures continue beyond Summer and have recently flown into other categories unrelated to re-opening of the economy.

The Baker Group is one of the nation’s largest independently owned securities firms specializing in investment portfolio management for community financial institutions.

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.

*The Baker Group LP is the sole authorized distributor for the products and services developed and provided by The Baker Group Software Solutions, Inc.

For More Information
The Baker Group Matt Harris, CFA

Matt Harris, CFA

Senior Vice President/Assistant Director of Asset/Liability Management
The Baker Group LP

mharris@GoBaker.com
800.937.2257

INTENDED FOR USE BY INSTITUTIONAL INVESTORS ONLY. Any data provided herein is for informational purposes only and is intended solely for the private use of the reader. Although information contained herein is believed to be from reliable sources, The Baker Group LP does not guarantee its completeness or accuracy. Opinions constitute our judgment and are subject to change without notice. The instruments and strategies discussed here may fluctuate in price or value and may not be suitable for all investors; any doubt should be discussed with a Baker representative. Past performance is not indicative of future results. Changes in rates may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

Baker Market Update – wk211008

October began with evidence of a continued steady economic expansion and signals from the Fed that “tapering” of their asset purchase program would likely begin in November. That thinking was bolstered by the data stream early in the week as Factory Orders, Core Capital Goods, and ISM diffusion measures for both manufacturing and service sectors showed steady though modest improvement. The bond market saw yields rise with the benchmark 10yr T-Note yield stepping up 10bps to 1.58% at the close Thursday. We got continued yield curve steepening as well as the 2yr/10yr yield spread widened out to 128bps. Everything seemed to be falling into place according to Jerome Powell’s plan. Then came the labor department’s jobs report for September which threw a bit of a wrench into things.

The US economy created 194K new payrolls last month. Not a bad data point in normal times, but far below the expected 500K or the six-month average of 681K coming into the day. Upward revisions to the two prior months of 169K softened the blow somewhat, and the unemployment rate actually fell to 4.8%, the lowest level since the early days of the COVID pandemic. Wage growth was up slightly as expected at 4.6% year-over-year, and the “underemployment” rate that includes part-timers wanting full-time work dropped down to 8.5%, also the lowest in a year and a half. The most disappointing component of the report was labor force participation which actually ticked down to 61.6%, still more than 2.5% below pre-pandemic levels and a reflection of the lingering supply-side challenges of the labor-market recovery. This, despite all the talk of expiration of enhanced unemployment benefits. Employers may feel continued pressure to pay up for employers, forcing the Fed to stretch their definition of the time horizon that constitutes “transitory” inflation. The continuing impact of the Delta variant of COVID remains an obstacle to payrolls growth as well with leisure and hospitality employment up only 74K, and despite the reopening of schools for in-person teaching, overall education employment fell by 180K when seasonally adjusted. Sub-optimal for sure.

So given this hodge-podge, the question becomes… what’s a Fed to do? After some initial indigestion, the bond market seems to be at peace with the idea that tapering will still commence by year-end with a likely announcement in November. Pre-release chatter had coalesced around the idea that the jobs number would have to be really bad to derail the Fed’s timeline. This number was not good, but can’t be characterized as “really bad.” So, carry on. Nothing to see here. You can expect the FOMC to stay on course and execute the taper as planned while holding the Funds rate low for a good long time. As for the yield curve, steepening remains the order of the day.

US 2yr vs 10yr T-Note Yield Spread

The Baker Group is one of the nation’s largest independently owned securities firms specializing in investment portfolio management for community financial institutions.

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.

*The Baker Group LP is the sole authorized distributor for the products and services developed and provided by The Baker Group Software Solutions, Inc.

For More Information

Jeffrey F. Caughron

President and Chief Executive Officer
The Baker Group LP

jcaughron@GoBaker.com
800.937.2257

INTENDED FOR USE BY INSTITUTIONAL INVESTORS ONLY. Any data provided herein is for informational purposes only and is intended solely for the private use of the reader. Although information contained herein is believed to be from reliable sources, The Baker Group LP does not guarantee its completeness or accuracy. Opinions constitute our judgment and are subject to change without notice. The instruments and strategies discussed here may fluctuate in price or value and may not be suitable for all investors; any doubt should be discussed with a Baker representative. Past performance is not indicative of future results. Changes in rates may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

Baker Market Update – wk211001

Wake me up when September ends… it is officially the start of October. As we welcome a new month, let’s take a look at the economic and market happenings from this week.

This morning brought us the core personal consumption expenditures price index, which excludes food and energy costs and is the Federal Reserve’s preferred measure of inflation. The index increased 0.3% for the month and was up 3.6% from a year ago. The monthly gain was slightly higher than the 0.2% estimate. This new inflation data comes a couple of days after Fed Chairman Jerome Powell spoke at the European Central Bank forum where he called inflation “frustrating.” He also stated that U.S. inflation could be prolonged into early next year because parts and material shortages might be getting worse. However, he is sticking to his view that inflation will cool off in 2022 as shortages ease, but supply chain issues aren’t clearing up as quickly as he had hoped.

New consumer spending and income data was also released this morning. Personal spending rose 0.8% and income was up 0.2%. Personal spending was revised downward to -0.1% for the month of July signaling that the delta variant likely had some impact on the demand of good and services. Also, U.S. consumer sentiment edged upward in September as the University of Michigan Consumer Sentiment index was at 72.8 vs. 70.3 last month. Despite the rise in consumer sentiment in September, the index remains well below the 101.0 level registered before he pandemic in February 2020.

Yesterday, weekly jobless claims jumped 362,000, a two-month high, amid a large increase in California. New claims have fallen in most other states giving hope that the labor market is reasonably healthy despite the delta variant. Many of the people who recently lost some or all of their unemployment benefits are likely to rejoin the labor force in the coming months and should make it easier for companies to hire. A lack of labor is one of the bigger challenges for the economy to recover from COVID.

Equity and bonds markets had their fair share of volatility this week. The Dow Jones Industrial Average is down about 700 points from the start of this week, but up this morning, potentially snapping a 5-day losing streak. On Monday, investors were spooked by the potential government shutdown that was eventually avoided this week as Congress passed a bill to keep the government funding through early December.

The 10-Year Treasury Bond Yield reached a recent high of 1.56% earlier this week and is now trading lower at a yield of 1.49%. The 2-Year Treasury Yield saw a recent high of 0.31% earlier in the week and is now back down to 0.27%. Investors were concerned with a longer lasting rise in prices and the prospect of tighter monetary policy with the Federal Reserve signaling that a “moderation in the pace of asset purchases may soon be warranted.” During his press conference last week, Chairman Powell gave further details saying, “A drawdown of the central bank’s $120 billion in monthly bond purchases could begin after the November policy meeting as long as U.S. job growth through September is reasonable strong.”

Will job growth through September remain reasonably strong? We will find out next Friday as we get our monthly employment data including the number of nonfarm payrolls added in September, average hourly earnings, the unemployment rate, and labor force participation rate. Next Friday’s data is likely to have a big impact on the Federal Reserve decision on when to start tapering asset purchases.

I’m glad I woke up this morning when September ended in order to author this newsletter. Have a great weekend and as Lester would say, “Be Careful Out There!”

The Baker Group is one of the nation’s largest independently owned securities firms specializing in investment portfolio management for community financial institutions.

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.

*The Baker Group LP is the sole authorized distributor for the products and services developed and provided by The Baker Group Software Solutions, Inc.

For More Information

Dale Sheller

Senior Vice President
Financial Strategies Group
The Baker Group LP

dsheller@GoBaker.com
800.937.2257

INTENDED FOR USE BY INSTITUTIONAL INVESTORS ONLY. Any data provided herein is for informational purposes only and is intended solely for the private use of the reader. Although information contained herein is believed to be from reliable sources, The Baker Group LP does not guarantee its completeness or accuracy. Opinions constitute our judgment and are subject to change without notice. The instruments and strategies discussed here may fluctuate in price or value and may not be suitable for all investors; any doubt should be discussed with a Baker representative. Past performance is not indicative of future results. Changes in rates may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

Baker Market Update – wk210924

With a wink and a nod, Federal Reserve Chairman Jerome Powell signaled to markets that a gradual reduction in the size of the Fed’s QE asset purchases could begin in November assuming the September jobs data is “decent.” Moreover, the Chair said a taper that “concludes around the middle of next year is likely to be appropriate.” A little quick, speculative math tells us that this could mean monthly reductions of $10bn in Treasuries and $5bn in MBS which allows for the complete elimination of the $120bn/month purchase program by that time. The willingness to telegraph an endpoint in advance is quite different from the 2013-14 experience when it was a less certain month-by-month process. Revised FOMC economic and interest rate projections were also released, showing a median GDP growth estimate for this year that was marked down to 5.9% from 7%, but for ’22 was bumped up to 3.8% from 3.3%. Core inflation is estimated to come in at 3.7% this year, but falling to 2.2% over the next two years. The “dot plot” projections of the trajectory for Fed Funds showed that nine of the eighteen officials expected one or more rate hikes next year, up from seven who thought so in July.

Initial market reaction to all of this was remarkably muted, but on reflection and absorption of the ripple effects, the bond market sold off sharply and pushed the 10yr T-Note yield up to 1.42%, the highest in over two months. The yield curve flattened initially, then steepened out to the widest since Independence Day as the difference between a 2yr versus 10yr Treasury yield now sits at 118bps. For its part, the stock market traded in a scatterbrained pattern (not a technical term) partly because of credit contagion fears from Evergrande, the Chinese property giant that’s facing a serious debt crisis and could presage a broader economic slowdown in China, where the real estate sector makes up about 30 per cent of GDP. If that wasn’t enough to cause tremors, we’re also having to witness the uniquely American ritual surrounding whether or not to pay our debts, when politicians are asked to raise the “debt limit” after they’ve already made irreversible commitments. Ugh. It’s no wonder the Dow traded in a 1200-point range Wednesday and Thursday.

On the data ledger this week, Housing Starts, Building Permits, Leading Indicators and New Home Sales all came in better than expected. While Existing Home Sales were weaker than expected and jobless claims jumped at bit. On balance, the data was neither good nor bad. Goldilocks would approve. Next week, look for fresh news on consumer sentiment and second quarter GDP data… and hopefully the US will decide to pay its bills.

US 10-Year T-Note Yield: Sept 2020 – Today

The Baker Group is one of the nation’s largest independently owned securities firms specializing in investment portfolio management for community financial institutions.

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.

*The Baker Group LP is the sole authorized distributor for the products and services developed and provided by The Baker Group Software Solutions, Inc.

For More Information

Jeffrey F. Caughron

President and Chief Executive Officer
The Baker Group LP

jcaughron@GoBaker.com
800.937.2257

INTENDED FOR USE BY INSTITUTIONAL INVESTORS ONLY. Any data provided herein is for informational purposes only and is intended solely for the private use of the reader. Although information contained herein is believed to be from reliable sources, The Baker Group LP does not guarantee its completeness or accuracy. Opinions constitute our judgment and are subject to change without notice. The instruments and strategies discussed here may fluctuate in price or value and may not be suitable for all investors; any doubt should be discussed with a Baker representative. Past performance is not indicative of future results. Changes in rates may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

Baker Market Update – wk210917

This week’s economic data were welcome news for the Federal Reserve, showing both a slowdown of inflation and an unexpected increase in Retail Sales. The Fed has long held to its expectation that the recent spike in consumer prices was driven by temporary pandemic related factors and the currently higher than desired level of inflation would be “transitory.” Tuesday’s release of the Consumer Price Index (CPI) seemed to confirm that expectation as the index rose just 0.3% in August, smaller than expectations for a 0.4% increase and a third as much as the 0.9% increase just two months ago in June (see Chart 1 below). A big reason for the moderation of CPI since early summer was the 1.5% drop in Used Car Prices in August versus the 7-10% increases each month in the Apr-Jun period. Also contributing to the moderation was the 2.3% drop in the price of Transportation Services which includes airfares. As more pandemic related bottlenecks in the economy and the supply chain continue to work themselves out, the Fed is betting the recent moderation in prices will continue and inflation will ultimately average 2% over time.

We won’t have to wait long to hear from the Fed as the FOMC meets this week and will release updated economic projections on Wednesday. While no one is expecting a significant change in the Fed’s statement, analysts will be closely watching for any potential news on two fronts. First, the Fed will release an updated “Dot Plot” and we will be looking for any indication FOMC members have altered their view of when and how quickly the Fed should begin raising rates (currently pegged at 2 hikes in 2023). Second, Chairman Powell’s press conference will be closely monitored for any additional indication the Fed is getting closer to “tapering” their $120 billion of monthly bond purchases. Economist recently surveyed by Bloomberg expect an official taper announcement to come in November with the slowdown in bond purchases beginning in December or January and lasting 6-10 months. So far, the Fed has managed expectations of the upcoming taper much better than it did in 2013 when the Fed spooked the market with poor communication and the 10yr Treasury Yield rose 140bp in four months before falling all the way back to record lows by 2016. This week the 10yr yield rose just 3bp to finish the week at 1.37%.

Source: Bureau of Labor Statistics

The Baker Group is one of the nation’s largest independently owned securities firms specializing in investment portfolio management for community financial institutions.

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.

*The Baker Group LP is the sole authorized distributor for the products and services developed and provided by The Baker Group Software Solutions, Inc.

For More Information
The Baker Group's Ryan Hayhurst

Ryan W. Hayhurst

Manager/Financial Strategies Group
Managing Director/The Baker Group LP

ryan@GoBaker.com
800.937.2257

INTENDED FOR USE BY INSTITUTIONAL INVESTORS ONLY. Any data provided herein is for informational purposes only and is intended solely for the private use of the reader. Although information contained herein is believed to be from reliable sources, The Baker Group LP does not guarantee its completeness or accuracy. Opinions constitute our judgment and are subject to change without notice. The instruments and strategies discussed here may fluctuate in price or value and may not be suitable for all investors; any doubt should be discussed with a Baker representative. Past performance is not indicative of future results. Changes in rates may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

Baker Market Update – wk210910

Even though football weather isn’t quite here yet in this part of the country, I think we can all say that football is officially back! Tough loss for the Cowboys last night as Tom “Father Time” Brady got the ball back with too much time on the clock. This week brought a relatively low number of economic releases as we observed Labor Day on Monday and no releases were schedule on Tuesday.

On Wednesday morning, job openings hit record high as employers struggle to find workers. Job openings jumped 749,000 to 10.9 million on the last day of July. It was the fifth straight month that job openings, which have been increasing since January, hit a record high. Additionally, layoffs rose moderately, suggesting last month’s sharp slowdown in hiring was due to employers being unable to find workers rather than weak demand for labor. The shortage of labor supply may ease in the coming months with the recent expiration of the Federal unemployment benefits, however, soaring COVID-19 cases could cause some hesitation among some people to return the labor force.

Thursday’s initial jobless claims hit a new pandemic low of 310,000 for last week. The four-week moving average fell to 339,500, also a pandemic low. Claims have trended lower signaling employers are holding onto workers despite a rise in COVID cases. Continuing claims fell to 2.78 million, a drop of 22,000.

This morning’s reading of the Producer Price Index 0.7% for the month, above the estimate of 0.6%, though below the 1% increase in July. On a year-over-year basis, the producer price index rose 8.3%, which is the largest annual increase since records have been kept going back to late 2010. The data comes during a time of heightened inflation fears fed by supply chain issues, a shortage of various consumer and producer goods and robust demand related to the pandemic. Taking a look at the market’s this morning we see that treasury markets are seeing somewhat of a selloff, more so on the longer end of the curve. The 10-Year Treasury Yield currently sits at 1.33% and the Dow Jones Industrial Average is off 114 points.

Next week’s economic release calendar is much heavier than what we saw this week. Many eyes will be on Tuesday morning’s release of the Consumer Price Index (CPI). Core CPI (excludes food and energy) is expected to have a monthly increase of 0.3% and headline CPI’s increase is expected to be 0.5%. Next Thursday brings another weekly update of initial and continuing jobless claims in addition to retails sales data. Lastly, Friday brings the University of Michigan’s Consumer Sentiment Index’s monthly update.

Enjoy your first weekend of a full slate of college and professional football games!

Producer Price Index – Year over Year Change (%): 2011 to Today

Source: Bloomberg, LP

The Baker Group is one of the nation’s largest independently owned securities firms specializing in investment portfolio management for community financial institutions.

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.

*The Baker Group LP is the sole authorized distributor for the products and services developed and provided by The Baker Group Software Solutions, Inc.

For More Information

Dale Sheller

Senior Vice President
Financial Strategies Group
The Baker Group LP

dsheller@GoBaker.com
800.937.2257

INTENDED FOR USE BY INSTITUTIONAL INVESTORS ONLY. Any data provided herein is for informational purposes only and is intended solely for the private use of the reader. Although information contained herein is believed to be from reliable sources, The Baker Group LP does not guarantee its completeness or accuracy. Opinions constitute our judgment and are subject to change without notice. The instruments and strategies discussed here may fluctuate in price or value and may not be suitable for all investors; any doubt should be discussed with a Baker representative. Past performance is not indicative of future results. Changes in rates may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

Baker Market Update – wk210903

The first week of September brought relief to long-suffering college football fans along with a slew of economic data that raises questions about the pace and strength of the US economic recovery. The recent data stream included a disappointment from the Dallas Fed’s manufacturing index which came at 9% versus 23% estimated, and down sharply from 27.3 the prior month. We also saw another ugly consumer confidence survey, this time from the Conference Board which clocked 113.8%, a drop of over 15 points. The ISM manufacturing index ticked up slightly to 59.9, but that’s still far below the 64.7% high last March. Numbers for factory orders, durable goods and capital expenditures all came in close to estimates, but that certainly cannot be said about the non-farm payrolls employment data released this morning.

The labor department tells us that job creation for August was a paltry (by comparison) 235k versus a consensus forecast of 733k and the prior month’s revised gain of over 1mm. Moreover, the participation rate remained unchanged at 61.7% and hours worked showed no improvement for the month. There was noteworthy weakness in the services sectors such as retail, leisure and hospitality. That is almost certainly an effect of the rising number of COVID-19 cases tied to the Delta variant which has slowed the return to work for employees in those sectors. Importantly, there are large and growing disconnects between available jobs and available (and qualified) workers to fill those openings. This is not just due to COVID knock-on effects, but also caused in part by the challenge of skills mismatch. The longer people are out of work, the more likely they are to lose their ability to compete in a labor market where technology is quickly changing how work gets done. Fully 37% of unemployed persons have been out of work for more than half a year. These mismatch dynamics are part of the reason that average hourly earnings popped by 4.3% YOY, well above the 4% estimate, as employers pay up to find qualified workers. One bright spot in the report was the so-called “underemployment rate” (those working part-time but wanting full-time) which has steadily fallen from its 22.9% high to just 8.8% today. And the headline unemployment rate dropped two ticks to 5.2%, the lowest level since COVID first hit.

As for Fed policy and market behavior, we were reminded by Fed Chairman Powell at Jackson Hole last week that there is an important distinction between reducing or “tapering” the pace of Quantitative Ease asset purchases and actually raising the Fed Funds rate. That distinction, along with sluggish growth data, would argue for a steepening of the yield curve which is indeed what we are seeing as the week comes to an end. There may be an argument that the urgency of tapering is lessened, but it’s a fairly weak case. If for no other reason, that’s because the distortion effect on financial markets needs to be removed and a steady chorus of FOMC officials has said as much. For now, the bond market seems content with a somewhat steeper curve, and an eye toward the next batch of numbers which include the JOLTS job openings report and wholesale inflation data next week.

US Long-Term Unemployment: 2005 – Today

The Baker Group is one of the nation’s largest independently owned securities firms specializing in investment portfolio management for community financial institutions.

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.

*The Baker Group LP is the sole authorized distributor for the products and services developed and provided by The Baker Group Software Solutions, Inc.

For More Information

Jeffrey F. Caughron

President and Chief Executive Officer
The Baker Group LP

jcaughron@GoBaker.com
800.937.2257

INTENDED FOR USE BY INSTITUTIONAL INVESTORS ONLY. Any data provided herein is for informational purposes only and is intended solely for the private use of the reader. Although information contained herein is believed to be from reliable sources, The Baker Group LP does not guarantee its completeness or accuracy. Opinions constitute our judgment and are subject to change without notice. The instruments and strategies discussed here may fluctuate in price or value and may not be suitable for all investors; any doubt should be discussed with a Baker representative. Past performance is not indicative of future results. Changes in rates may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

Baker Market Update – wk210827

All eyes were on the Federal Reserve this week leading up to the virtual Jackson Hole Symposium as markets awaited any news that the Fed would soon begin to “taper” their $120 billion of monthly bond purchases. Atlanta Fed President Raphael Bostic spoke early Friday morning saying “We should be trying to get our policies back into a more normal situation…We have been at a very extreme level of accommodation” and “the economy calls for us to pull off of that a little bit and let the economy stand on its own.” His comments added to those of Fed Presidents from Kansas City, St. Louis and Dallas this week urging an early taper. But it was Chairman Jerome Powell’s closely watched Friday speech that finally cemented the expectation that the Fed will begin tapering their bond purchases soon. Powell said the economy had now met the prerequisite of “substantial further progress” needed to taper, while also cautioning that they will be “carefully assessing incoming data and the evolving risks” as the Delta variant spreads rapidly. Powell was also careful to avoid a repeat of the 2013 “taper tantrum” when the 10yr yield nearly doubled in 4 months as the market assumed the beginning of the taper meant rate hikes were close behind. Powell sought to draw a sharp distinction between taper and rate hikes by stating, “The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.” This carefully coordinated Fed communication seems to have paid off. The 10yr yield had risen about 10bp this week in anticipation the Fed would announce a taper, but following the Friday morning speeches, the 10yr rallied slightly to 1.33% at publication.

The economic news this week was mixed. New and Existing Home Sales were reported to have increased more than expected in July despite surging prices and limited inventories, while Durable Goods Orders fell slightly and a closely watched Purchasing Managers Index was weaker than expected for August. But more than 2/3rds of U.S. GDP comes from consumer spending and Friday’s Personal Income and Spending report showed that despite a boost in income from the advanced child tax credit payments, real consumer spending actually fell in July. With income exceeding spending yet again, the personal savings rate rose slightly to 9.6% which is up from 8.8% last month but down from 27% in March of this year and 34% in April 2020. A drop in the personal savings rate from earlier this year was welcome news for financial institutions flush with deposits and eager for loan demand so any rebound in the savings rate driven by even more government stimulus payments will be closely watched in the months ahead.

Personal Savings as a % of Personal Income: 2011 – Today

Source: Bloomberg, LP

The Baker Group is one of the nation’s largest independently owned securities firms specializing in investment portfolio management for community financial institutions.

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.

*The Baker Group LP is the sole authorized distributor for the products and services developed and provided by The Baker Group Software Solutions, Inc.

For More Information
The Baker Group's Ryan Hayhurst

Ryan W. Hayhurst

Manager/Financial Strategies Group
Managing Director/The Baker Group LP

ryan@GoBaker.com
800.937.2257

INTENDED FOR USE BY INSTITUTIONAL INVESTORS ONLY. Any data provided herein is for informational purposes only and is intended solely for the private use of the reader. Although information contained herein is believed to be from reliable sources, The Baker Group LP does not guarantee its completeness or accuracy. Opinions constitute our judgment and are subject to change without notice. The instruments and strategies discussed here may fluctuate in price or value and may not be suitable for all investors; any doubt should be discussed with a Baker representative. Past performance is not indicative of future results. Changes in rates may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

Baker Market Update – wk210820

Markets

For a week with significant geopolitical turmoil and the continued threat of the Delta variant, the bond market was largely unchanged. Yields as across the curve remained range bound as the 10Yr started the week at 1.27% and is currently 1.24%. Both short- and long-term rates acted similar as the 2 Year sits at .21-.22% and long bond (30Yr) dropped 5 basis points from 1.92% down 1.87%. Turning to the equity markets, all three major indices lost a little ground this week coming in approximately 0.3% and 0.5% lower before Friday’s market close which is positive today. Oil prices came lower this week as West Texas Intermediate decreased from $67.29 a barrel to around $63 currently.

Economic Data

Looking at this week’s economic data there was a slew of releases, most of them to the downside. On Monday, the Empire State Manufacturing Index tumbled losing almost all of the gains in prior month’s as it was previously hitting record highs. The index dropped to 18.3 from 43.0 with a median forecast of 29.0 meaning there were expectations of a pullback but not a complete reversal. Investors will look further into manufacturing when the August ISM index is released in early September, it has fallen the last two months. On Tuesday retail sales (including automobiles) dropped -1.1%, the second time in three months as analyst were expecting a drop of only 0.3%. While retail sales are still up 16% in the last year and still exceed pre-pandemic levels, expectations are for it to continue to weaken as the effects of government stimulus and pent-up demand wear-off. Wednesday saw US housing numbers from the National Association of Realtors. Homebuilding fell more than expected as new housing starts fell 7% in July. Housing permits on the other hand did see slight uptick. Also, on Wednesday the FOMC released their July meeting minutes which suggested the tapering of bond purchases could begin as early as late 2021. More on this next week as the FOMC will travel to Jackson Hole, Wyoming for the KC Fed Economic Symposium. Finally, on the positive side of the data releases, Leading indicators (a composite index which forecasts the future direction of the economy) grew in July 0.9% compared to June (0.7%).

Next Week

Turning to next week’s economic calendar, Monday and Tuesday, US existing and new home sales will be released. On Wednesday durable goods orders will be published as investors continue to get a hold of the business investment outlook. On Thursday, the 2nd Quarter GDP will see the second estimate which currently sits at 6.5% from the initial release. The Fed’s Summary of Economic Projections indicate GDP to be approximately 7% for the year. And on Friday to wrap the week, investors will see personal income, consumer spending, and the University of Michigan Consumer Sentiment index.

Treasury Yields and Taper Talk

The market’s reaction to the Fed discussing tapering was for stocks to decline and Treasuries to remain steady with the long end outperforming. This is in line with prior QE events and market history. An end to prior QE rounds sent yields lower (aside from the short lived Taper Tantrum of 2013) and saw stocks lose momentum as investors reprice expectations of less central bank stimulus and lower growth outlook.

SOURCE: H/T – BLOOMBERG/CHART OF THE DAY Garfield Reynolds

The Baker Group is one of the nation’s largest independently owned securities firms specializing in investment portfolio management for community financial institutions.

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.

*The Baker Group LP is the sole authorized distributor for the products and services developed and provided by The Baker Group Software Solutions, Inc.

For More Information
The Baker Group Matt Harris, CFA

Matt Harris, CFA

Senior Vice President/Assistant Director of Asset/Liability Management
The Baker Group LP

mharris@GoBaker.com
800.937.2257

INTENDED FOR USE BY INSTITUTIONAL INVESTORS ONLY. Any data provided herein is for informational purposes only and is intended solely for the private use of the reader. Although information contained herein is believed to be from reliable sources, The Baker Group LP does not guarantee its completeness or accuracy. Opinions constitute our judgment and are subject to change without notice. The instruments and strategies discussed here may fluctuate in price or value and may not be suitable for all investors; any doubt should be discussed with a Baker representative. Past performance is not indicative of future results. Changes in rates may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

Disclaimer: INTENDED FOR USE BY INSTITUTIONAL INVESTORS ONLY. Any data provided herein is for informational purposes only and is intended solely for the private use of the reader. Although information contained herein is believed to be from reliable sources, The Baker Group LP does not guarantee its completeness or accuracy. Opinions constitute our judgment and are subject to change without notice. The instruments and strategies discussed here may fluctuate in price or value and may not be suitable for all investors; any doubt should be discussed with a Baker representative. Past performance is not indicative of future results. Changes in rates may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.