Market Insights – February 20, 2018

February 20, 2018 Chatham Financial

Inflation Lifts 10-Year Note Closer to 3%

View this week's rates.

Prior Week Summary

The economic data calendar was busy last week led by a stronger than anticipated CPI report. The Labor Department reported that consumer prices rose 0.5% in January, besting the consensus expectation for a gain of 0.3%. Over the course of the year, headline prices increased 2.1%. Excluding the more volatile food and energy inputs, prices rose 1.8%. The report detailed a sharp rise in apparel prices, which increased 1.7%, as well as a 0.3% increase in rents and a 1.3% advance in car insurance premiums. In a separate report from the Labor Department, wholesale prices were said to have gained 0.4%, bringing the year-over-year increase to 2.7% from a year earlier. The 2.5% increase in core PPI is the largest gain in the last four years and supports the market’s preferred narrative – that the Fed will need to continue to raise rates as the economy is starting to generate consistent pricing pressures. On the other side of the coin, retail sales growth underwhelmed market expectations, falling 0.3% in January as auto sales fell 1.3% and a 2.4% decline in building materials weighed on the composite.

The gains in the inflation readings brought the 10-year Treasury note ever closer to the 3% barrier, trading as high as 2.94% on Thursday.

The Look Forward

The main event for this week is the significant amount of Treasury supply coming to the market to fund our increasing deficits. The government will look to sell $258 billion worth of debt this week, the greatest amount ever sold in a week. The laundry list includes $51b on 3-month bills, $45b of 6-month bills, $35b 5-year notes and more! In addition to the standing economic data releases, trading levels are likely to be driven by how much concession the market will need to price in on these auctions to clear the market.

 

Rates Snapshot

Sources: Bloomberg Finance L.P., (Treasuries) Chatham Financial (Swap Curves), FHLB Boston, Chicago, Dallas, Des Moines for FHLB Advance Rates. Wells Fargo Brokered CD Indications.

 

Market Implied Policy Path (Overnight Indexed Swap Rates)

Source: Chatham Financial

 

Fixed Income Snapshot

Source: Bloomberg Finance L.P.

 

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Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions.

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Market Insights – February 26, 2018
Market Insights – February 26, 2018

It was a relatively light week for economic data and flows were largely driven by a heavy debt issuance cal...

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Market Insights – February 12, 2018
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