Last week was quiet on the transactional front with the holiday but busy in terms of rate movement. The curve continued to steepen, with 2-year Swaps coming down 15 BPS and 10-year Swaps coming down 12 BPS, making the inversion from 2’s to 10’s about 60 BPS. Overnight SOFR remains at 5.32%, which is unlikely to change much until the Fed is ready to act. JOLTS numbers on Tuesday were a slight improvement but still elevated, historically speaking. Wednesday, we had ISM Services come in at 48.8, which was the lowest reading since early on in COVID. Friday’s payroll figure was the big one, with June numbers coming in higher than expected, but the prior 2 months were written down by 111,000, which is what the market focused on. Rates came down pretty aggressively following this news.
At this stage, there are still two cuts priced in for 2024, but the chance of a 2nd cut in December is now almost up to 100%. A weaker labor market may mean the Fed will look to begin the cutting cycle more quickly. There are an additional four cuts priced in for 2025, totaling around 185 BPS. The Fed can’t directly control the longer end of the curve, but historically the 10-year Treasury yield has dropped an average of 140 BPS during Fed cutting cycles. Powell’s testimony on Tuesday will be watched closely for any clues surrounding their plans to cut rates. We will also get new CPI data on Thursday, followed by PPI on Friday, both which are expected to tick up a bit. Core CPI is expected to stay flat.
It remains a great time to look at short term hedges, since the cuts will factor into pricing regardless of whether they all come to fruition. We advise our clients to still execute even if they think rates are coming down, just with a shorter term. There’s always the option to blend the rate down via an extension once rates do begin to dip.
