This week started with a flight to quality as markets reacted to conflict in the Middle East and potential escalation. The 10 Year began trading Tuesday after the long weekend and immediately dropped from its previous close of 4.80% to 4.65%, as markets opened. The mid-week economic reports drove trading on Wednesday/Thursday. First off, PPI (wholesale prices) was up 2.2% annually with core up 2.8% (slightly higher than previous months). Notably, goods inflation outpaced services – is this signaling the long awaited cooling in services employment/costs that are so closely watched by Fed officials? Speaking of Fed officials, Philly Fed President Patrick Harker’s comments in Delaware gained a lot of attention: ‘I believe that we are at the point where we can hold rates where they are.’ Wow. Of course, I think it is assumed that his (prepared) remarks had the blessing of Fed Chair Powell. Harker also nodded at higher treasury yields, noting that the higher fixed rate index is “doing our work for us.” Perhaps the recent run up in Treasury yields is acting as a substitute for the contemplated rate increase in one of the final two Fed meetings this year. This changes the “higher for longer” narrative to “high for longer”- aka we are already there at the top. It’s way too early to spike the football or assume raises are over. And it seems even if the Fed is done raising, it’s a long way from “even thinking about thinking about” cutting. To paraphrase Chair Powell’s comments about raising rates in June 2020 vs Thursday’s CPI was slightly hotter than expected at 0.4% monthly/3.7% annually (0.1% above expectations). With core up 0.3%/4.1%, exactly at expectations, markets took it as a “win” as it won’t spur the Fed to unexpectedly hike. Again, the “controversial” shelter cost component was a huge part of the increase, a possible lagging indicator. Friday saw a continuation of the “peak yield narrative” rally along with flight to quality. The 10 Year ended at 4.61%. Stay tuned…
By David R. Pascale, Jr., Senior Vice President at George Smith Partners