This week, the 10-year treasury yield rose above the key psychological level of 4.00%. Hawkish statements by Fed policymakers indicate a resolve to not cut rates until 2024. Recent hotter-than-expected data(CPI, PCE, etc) has changed the narrative: inflation may be “stickier” than was assumed. This week also saw high CPI data from the 3 largest economies in Europe: England (10.1%), Germany (9.3%), and France (7.2%). This is driving up international bond yields. The latest market/futures/Fed talk consensus estimates are for 25 bp increases at the next three meetings and then (hopefully) a pause. That would put the Fed Funds rate, and SOFR, at around 5.40% at mid-year, aka the “Terminal Rate.” This month’s data is especially critical. The Fed is highly focused on labor/service costs and a(seemingly and stubbornly) tight job market as the main driver of inflation. This month’s data releases are critical (when aren’t they these days?) – Job openings 3/8, Employment report 3/10, CPI 3/14, PPI 3/15. The WSJ reported yesterday on signs of a cooling labor market in private-sector job postings. This trend has not yet appeared in official Labor Department data releases: the infamous “lagging indicators” may be at work here. Also, December and January data releases are skewed by “seasonal adjustments.” Therefore the March data releases (based on February’s data) may confirm some long-awaited “slack” in the labor market. As we approach the 1 year anniversary of the first Fed increase, the path forward remains murky. Stay tuned…
By David R. Pascale, Jr., Senior Vice President at George Smith Partners
