The Plot Thickens
Prior Week Summary
It was an active week for financial markets that saw the FOMC raise their target range for federal funds by 25 basis points to a range of 1.75% – 2.00%. Concurrent with the increase in the funds rate, the Committee also increased the interest paid on excess reserves by a smaller amount (20 basis points) to help push the effective fed funds rate closer to the mid-point of the target range. The updated Summary of Economic Projections detailed that Committee members expect to raise the target rate another 50 basis points this year, presumably at the September and December meetings.
The Committee stated that it “expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term.”
In other economic news, measures of inflation increased roughly as expected, with CPI increasing by 0.2% in May while producer prices advanced 0.5% in May, supporting the Fed’s hawkish view. Similarly, retail sales put in a strong showing, gaining 0.8% in May, after gaining an upwardly revised 0.4% in April.
The curve continued its relentless flattening trend, with the spread between 2-year and 10-year Treasury notes falling another 6 basis points week-over-week to a spread of 37 bps.
The Look Forward
The market has a relatively small amount of economic data to comb through this week, with updates expected on the state of the housing market as well as the manufacturing sector.
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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