Market Recap: February 10, 2025
Last week saw notable market movements, particularly on the short end. 2-year swaps ended up 8 BPS higher, while the 10-year swaps closed down by 1 basis point, settling at 4.08%.
Key Economic Data and Market Drivers:
- The week started strong from a yield perspective but was met with weaker-than-expected data. Tuesday’s JOLTS report showed job openings 400,000 below expectations and 500,000 below the prior month’s print.
- Wednesday’s ISM Services report came in weak, with the headline print missing expectations. Notably, the prices paid component was significantly lower at 60.4 versus the surveyed 65, which the market welcomed as a sign of potential inflation cooling.
- Treasury Secretary Bessent announced no increase in the size of long-term debt issuance, leading to a decline in long-term yields.
- Friday’s Nonfarm Payrolls report showed a slightly weaker headline number at 143,000, with an additional 100,000 in downward revisions. Hourly earnings rose unexpectedly, and unemployment dropped, though the report carried considerable noise.
- The University of Michigan’s inflation expectations survey revealed a sharp increase in the 1-year inflation outlook, printing at 4.3% versus the expected 3.3%. This led to a significant selloff in the short end of the swaps market.
Looking Ahead:
- Inflation data will be in focus this week, with CPI on Wednesday, PPI on Thursday, and Retail Sales on Friday.
- Treasury auctions for 3-year, 7-year, and 30-year bonds will add a fairly heavy issuance load to the market.
- Fed Chair Powell’s congressional testimony on Tuesday and Wednesday will be closely watched for guidance on monetary policy. Last week, the market priced out 11-12 basis points of rate cuts, and Powell’s testimony could further influence expectations.
Macro Developments:
- A wave of executive orders has introduced an element of uncertainty, with markets in a wait-and-see mode regarding their economic impact.
- Agency lending is experiencing delays, making it prudent to initiate financing processes early.
- Loan extensions are becoming more difficult as banks tighten their lending standards.
- New tariffs, particularly on commodities such as steel and aluminum, may start affecting commercial real estate markets.
- While the Fed remains unlikely to adjust rates in the near term, softening labor data and downward revisions suggest a slight slowdown in economic momentum.
Conclusion:
Markets remain sensitive to economic data and policy signals. With key inflation reports, Treasury auctions, and Powell’s testimony on deck, this week will be pivotal in shaping rate expectations and broader market sentiment.
