Last week was a very fascinating and volatile week. The biggest news was the Federal Open Market Committee (FOMC) meeting, as well as Powell’s comments thereafter. Two-year yields and 10-year yields were down 27 BPS and 31 BPS week over week, respectively. Almost all of that movement occurred on Wednesday.
Powell made his most dovish statement of recent memory. He indicated the current cycle of increasing rates is over and that the FOMC could cut rates before they hit their 2% inflation target. Following this rhetoric, Bloomberg’s model predicted an additional two rate cuts in 2024 (now six in total), despite the Fed’s dot plot showing three.
Hopefully the credit markets will open up and the lending “spigot” will follow. The message sent to the market was likely more significant than Wednesday’s drop in rates for now. The reaction following the first cut next year will be a great indicator. While these signs are very encouraging and it seems like the Fed has pivoted, they could change their minds again. Core Consumer Price Index (CPI) is still not where the Fed wants it to be.
It seems that lenders will be more willing to lend, and borrowers are looking to borrow again. However, we caution against the “euphoria” that some borrowers showed last week. There are likely more volatile days ahead. If inflation ticks back up, a lot of the treasury (TSY) rally could quickly come back. It’s hard to believe, but we’re still far off from 2023’s lows for 2- and 10-year yields (April/May).
This week we have gross domestic product (GDP) numbers on Tuesday and personal consumption expenditures (PCE) Deflator numbers on Friday. PCE Deflator is the Fed’s preferred gauge of inflation.
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