Inflation Takes a Breather, Fed on Deck
Prior Week Summary
The swap curve continues to flatten, led by a relatively quick increase in the front-end of the curve, while longer term rates have been remarkably stable. Since the beginning of February, 1-month LIBOR has increased 24 basis points, while 3-month LIBOR has increased 43. On the other hand, the 10-year swap rate has traded within 10 basis points of its current level for 31 of the last 32 trading days. The latest reading from the CME’s Fedwatch tool calculates that there is a 95% implied probability of a 25 basis point hike at this week’s Fed meeting priced into Fed Funds Futures. The flattening is even more pronounced in the implied forward curve, which implies a spread between the 3-month and 10-year tenors of only 12 basis points in two years’ time.
In economic news, The Labor Department reported that consumer prices rose 0.2% in February, after gaining 0.5% in January. The report detailed that energy prices rose 0.1%, while housing costs increased 0.3%. Inflation adjusted hourly earnings gained 0.4% in February, following a robust 0.7% reading in January. In a separate report, the latest figures from the Commerce Department indicated that retail sales fell 0.1% last month, the third straight month of declines. Seven of the thirteen categories showed month-over-month declines, including a 0.9% drop in auto sales.
The Look Forward
The main event this week will be the outcome of the Fed’s rate decision on Wednesday, which is widely expected to conclude with a 25 basis point hike in the policy rate. The market will also look to the updated Summary of Economic Projections for the updated dot plot, as well the Chairman’s press conference for direction.
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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