The Return of Market Volatility?
Prior Week Summary
Last week the market reminded investors that sentiment and momentum are powerful forces that can change on a dime. Both equity and fixed income markets saw sharp price declines on the back of positive economic data, as well as the increased perception among market strategists that longer term projections for interest rates may need to be recalibrated. Alan Greenspan, who famously coined the term “irrational exuberance”, claimed last week that the “bond market bubble will eventually be a critical issue” and added “we’re working toward a major increase in long-term interest rates”. The former Fed Chairman has a mixed track record of calling asset bubbles, but his perspective merits some consideration.
The concern over rising budget deficits and increasing inflation has pushed the 10-year Treasury note yield toward 2.85%, a 45 basis point increase from the start of the year. The January employment report handily beat consensus expectations, detailing that the economy added 200,000 jobs in the first month of the year, with the unemployment rate staying steady at 4.1%. Average hourly earnings increased 0.3% in January, adding 2.9% on a year-over-year basis.
As of this publication, the market has now begun to price-in nearly 3 additional Fed hikes over the course of the year, with expectations for moves in March, June and December.
The Look Forward
There is a relatively light data calendar for this week, beginning with updated data expected on the state of the manufacturing economy as well as the trade balance. There is a full plate of Fed speakers on deck this week as well as a full government auction calendar for the market to digest.
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
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