During the week of August 28th, several economic indicators fell below expectations with Job Openings and Labor Turnover Survey (JOLTS) and Gross Domestic Product (GDP) reporting. GDP came in lower than anticipated, non-farm payrolls had large downward revisions, and the unemployment rate ticked up to 3.8% from 3.5%. This resulted in drops in two- and ten-year swaps of 18 basis points and 8 basis points respectively. Overall, employment and economic growth are showing signs of decline in-line with the Fed’s desires with the continued rate increases.
Last week was relatively uneventful in terms of data, with some minor increases in swap rates with two- and ten-year swaps creeping back up by 11 basis points and 8 basis points respectively. The lower activity was attributed to a short holiday week. However, the upcoming week promises a full calendar of economic reports, including Consumer Price Index (CPI) on Wednesday, retail sales and Producer Price Index (PPI) on Thursday, and consumer sentiment on Friday.
There is little expectation of a Fed rate increase in the near term in the swaps market, with the market pricing in such a move for the following summer. Thin trading volumes contributed to increased volatility in rates last week.
The CMBS lending market remained quiet, with limited transactions and discounts on office deals. Lenders continue to have restrictions on financing, particularly for office products. Despite some delays, most transactions were still closing, and deals have not seen the volume of delays or failures seen in previous months.
Overall, there exists an exceedingly modest premium in the term rate, accounting for the potential risk of a Fed tightening in the upcoming weeks. However, it’s worth noting that the likelihood of such an event transpiring is quite low. In fact, the market has factored in minimal probability for a Fed rate increase, extending its expectations all the way out to August of next year. As a result, we find ourselves looking at a timeline of approximately a year before any substantial shifts in the futures market, with the consensus suggesting that the market has largely discounted the possibility of a near-term decrease in Fed rates, pointing more toward potential changes next summer.
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