We saw a lot of volatility last week with treasury yields across the whole curve. Two-year and 10-year yields were down 41 and 27 basis points on the week, respectively. Personal income and spending showed a continued downward trend, while the Personal Consumption Expenditures (PCE) deflator numbers missed their month-over-month (MoM) headline number to the downside. The year-over-year (YoY) figure also missed its target, causing treasury yields to fluctuate within a 10-basis point band on Thursday. On Friday, following a volatile week across the board, yields dipped an average of about 14 basis points along the whole curve.
The 10-year yield has now fallen 80 basis points since its peak in late October. Fed funds futures are now predicting a total of 5 rate cuts (125 BPS) by the end of 2024. Bloomberg economics certainly has more of an aggressive outlook than some, but per their model there’s now a 65% chance that the first cut will come at the March 20th Fed meeting. This may be optimistic, as inflation will still need to come down for the cuts to make sense. However, at a certain point the Fed might be forced to follow the market if they aggressively keep pricing cuts in. Jerome Powell didn’t seem concerned about inflation during his speech on Friday.
Price discovery can be extremely challenging when rates fluctuate 40 basis points within a single week. We expect this issue to persist with tons of employment numbers being released this week. Job Openings and Labor Turnovers (JOLTS), initial jobless claims, and payrolls releases will be interesting to watch.
Overnight SOFR spiked up about 8 basis points on Friday, which was unusual. Our traders believe there’s excess cash in the system right now that needs to be financed going into the year-end. This belief is causing short-term rates to slightly increase.
There seems to have been a slight increase in activity on the Municipal side following the drop in rates, which is hopefully a sign of things to come in the commercial space. There’s not much new to note on a Macro level, as the House was busy last week removing George Santos.
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