GDP Growth and Rainy Day Funds
Prior Week Summary
The sell-off in rates continues to gain momentum on the back of mostly positive economic data. As we close out the first month of the year, rates across the Treasury complex are higher by about 30 basis points over this relatively short timeframe. The shift higher in rates has been parallel across the curve, leaving the spread between 2-year and 10-year rates close to the lowest levels in nearly a decade.
The Commerce Department reported that 4th quarter GDP increased 2.6%, short of expectations for a 3% annualized increase. Despite the small headline miss, consumer spending increased an impressive 3.8%, led by an increasing willingness on the part of households to finance current consumption with debt. Along those lines, the savings rate fell to 2.4% in December, the lowest level of that metric since the 3rd quarter of 2005. Of course, optimism on the part of consumers is positive for current period growth, but can cause problems down the line if the expected gains in wealth from appreciation in equity and real estate investments fails to match current lofty expectations.
There remains a nearly 95% probability of a Fed rate hike at the March meeting, and roughly 2.5 hikes priced in for the next 12 months.
The Look Forward
The market will be looking forward to the January unemployment report this Friday to see if payrolls can rebound from the soft reading in December, which was led by a drop in retail employment. There is also a Fed rate decision on Wednesday, which is widely expected to produce no headlines, as the market is pricing in nearly 0% odds of any change in policy.
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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