Last week, 2Y swaps closed at 3.86%, 17 bps higher than the prior Friday low of 3.69%. 10Y swaps gained 14 bps to close at 3.49%. Strong ISM Services reads on Monday (51.4% vs. 51.0% surv. | 48.8% prior) and a drop in the Initial Jobless Claims (233K vs. 240K survey. | 249K prior) helped steady markets. Very poor demand for 10Y and 30Y treasuries may have also pushed rates higher. On Friday we heard from the head of the Kansas City Fed, Schmidt, who noted that the market might be overly optimistic about good news while overlooking ongoing inflation concerns. He suggested it’s premature to start cutting rates, contrary to market expectations, which are pricing in five interest rate cuts by year-end.
This week, we turn back to inflation with PPI on Tue. (YoY 2.70% survey. | 3.0% prior), and all eyes are on Wed. CPI (Core MoM 0.2% survey.| 0.1% prior) and (Core YoY 3.2% survey.| 3.3% prior). We also get Retail Sales on Thursday. There are currently four cuts priced into the SOFR swaps market for 2024, with chances of emergency cuts and 50 bps cuts still on the table. There’s increasing concern about a potential recession. Consumers are feeling the pinch, opting for used cars instead of new ones and cheaper groceries like chicken instead of steak. The lower end of the economy is especially strained. Current sentiment is split—there’s a 50/50 chance of a soft landing versus a full recession. Second-quarter earnings are showing weaknesses, with companies like Disney struggling, as lower-income consumers can’t afford their products, and higher-income consumers are spending elsewhere. We’re not out of the woods yet. Uncertainty continues with no clear legislative developments until after Labor Day. The potential for a recession is being widely discussed, with second-quarter earnings showing soft spots.
