Another economic data point was met with a remarkable market reaction as CPI offered a little breathing room for the market as it relates to the Fed’s proclivity for future rate cuts. Core-CPI MoM at ...
Another economic data point was met with a remarkable market reaction as CPI offered a little breathing room for the market as it relates to the Fed’s proclivity for future rate cuts. Core-CPI MoM at an unrounded +0.225%, was lower than survey results and, more importantly, the previous 4 months of data. One month does not make a trend, but it is meaningful to note that the 3-month annualized rate fell from 3.7% to 3.3%. Prior to the release, 10-Yr Treasuries had tested 4.80%. The market responded to the softer inflation data with a retracement from the highest yields we’ve experienced since November 2023. After rates peaked, a bullish tone could be expected with rates remaining within the still upward trending range thus far. The 4.50% level (as shown below) will be key for holding the line both as a technical support level and as it relates to the upward trend. It is also relevant given current and anticipated Fed Funds rates. It is specifically noteworthy, with the Fed’s current target rate range being 4.25-4.50% and 10-Year Treasuries now commanding a rate premium over shorter-term debt. Therefore, the yield on 10-Yr Notes will be hard-pressed to get below the 4.50% barrier until Fed sentiment turns more bullish.
Fed Funds Futures are now pricing in nearly 40 of the 50 basis points of Fed cuts as indicated by the Fed Dot Plot in December. Assuming the Fed can execute two cuts of 25 basis points each (a questionable accomplishment per yours truly), a steeper, normal yield curve suggests 10-Year Treasuries should expect to consistently remain above the 4.50% threshold. Given fundamental factors, including Trump policies influencing inflation and the Treasury under Bessent increasing the size of longer-term Treasury auctions, I continue to question that the Fed will be able to cut in 2025 and expect the 5% threshold to be breached for 10-Year Treasuries. Consistently favorable inflation data is needed before I’m willing to concede these levels.
From the SWBC trading desk…
Client activity sharply reversed course from the prior week. On Monday, trading began with a cautious tone as the market anxiously waited for PPI and CPI. The slightly lower print for PPI on Tuesday provided support for municipal rates and the negative tone from last week dissipated. On Tuesday, the bid side returned to the market and, despite a larger calendar, munis outperformed Treasuries. The strength continued the following day, and if accounts weren't involved on Tuesday, they most certainly were on Wednesday. PSF deals, like Sunnyvale, were repriced from 5-15 basis points stronger across the curve. The NY Tribe deal was upsized to $1.6 billion from $1.3 billion. Rate volatility, sticky inflation, and an unclear path of future policy have forced accounts to the sidelines and dealers to be more cautious with balance sheets. The reversal in tone from the economic data provided proof that money continues waiting to be deployed — and that there is plenty of it. Ratios finally bounced off the low levels as we saw the 10-Yr hit 69% and the 30-Yr hit 84% — the level at which accounts appear comfortable engaging the market.
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