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Market Update

Cool CPI report drives rates lower

January 17, 2023
  • william smith headshot


    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA


In the first full trading week of the year, Treasuries and the major U.S. equity indices advanced as market participants welcomed signs of easing price pressures and a less aggressive Federal Reserve.

Interest rates

  • Treasury yields fell, most notably at the long end, across a more inverted curve.
    • While the 2-year Treasury yield experienced a modest two-basis point weekly decline, the 10-year Treasury declined a more pronounced six basis points, pushing the 2s/10s basis deeper into negative territory at -0.73%.
    • The decline accelerated on Thursday following the release of the highly anticipated December Consumer Price Index (CPI) reading, which indicated that prices declined 0.1% month-over-month.
  • Looking at Fed Funds futures pricing on Friday, Federal Reserve policy rate expectations remained roughly the same week-over-week.
    • Market participants currently expect the FOMC to raise the Target Range by 25 basis points at the next meeting in early February and to arrive at a peak Target Rate of either 5% or 5.25% by the summer of 2023 before falling to approximately current levels by year-end.
  • Several Federal Reserve officials held speaking engagements throughout the week and commented on the 2023 rate outlook.
    • All officials supported further hikes, but the magnitude differed across individuals as Patrick Harker and Susan Collins called for a 25 basis point hike at the next meeting, while Fed hawk James Bullard advocated for moving rates “above 5% expeditiously.”

Trading commentary

  • Hedging activity has remained robust into the new year.
  • Last week, we saw hedging activity in both directions as asset-sensitive clients looked to protect against a falling interest rate environment, while our liability-sensitive clients endeavored to lock in the cost of new wholesale borrowings, preserving margin in a rising rate environment.
    • Although hedging for falling rates continues to take the lion’s share of executions crossing our balance sheet strategies desk, we have seen a notable increase in hedging for rising rates in the past month.
    • In recent history, we have seen clients primarily leverage improvements to the fair value hedge accounting framework to achieve the accounting objectives in rising rate hedges, but with the need for wholesale funding increasing across our client base, we have seen a shift with most clients protecting against a rise in interest rates utilizing wholesale borrowings in the hedge accounting relationship rather than looking to fixed-rate loans or AFS securities.

Q4 earnings season begins

  • Fourth quarter earnings season kicked off last week with several of the largest U.S. financial institutions reporting earnings.
    • Bank of America and JPMorgan Chase reported substantial improvements to net interest income quarter-over-quarter on the back of the 1.25% of rate hikes delivered by the FOMC in the fourth quarter.
  • While the mood appears generally positive for 2023 based on their earnings commentary, executives at JPMorgan Chase and Bank of America both were hesitant to provide long-term net interest income guidance given the uncertainty in the rate outlook.

Economic data

  • In a light week for economic data releases, the bulk of investors’ attention was centered on the release of the December CPI report.
    • According to the Commerce Department, consumer prices decreased 0.1% month-over-month, the first monthly decline registered since the early days of the pandemic in May 2020.
    • While falling energy prices drove the decline in the headline figure, the core CPI measure, which excludes the often-volatile food and energy components, advanced 0.3% over the month, in line with the consensus expectation but modestly below the 0.4% average over the last year.
      • Broadly speaking, investors viewed the report favorably as signs of easing inflation accompanied expectations for a less hawkish FOMC going forward.
  • In a bright spot, the University of Michigan Consumer Sentiment Index advanced far above analysts’ expectations on the back of a significant drop in consumers’ near-term inflation expectations.
    • Digging into the report, the current conditions and future expectations measures improved to nine-month highs, and the 1-year inflation expectation dropped to its lowest level since April 2021.

The look forward

Upcoming economic data releases

  • Empire Manufacturing Index – Tuesday
  • MBA Mortgage Applications – Wednesday
  • Retail Sales – Wednesday
  • Producer Price Index – Wednesday
  • Industrial Production – Wednesday
  • Beige Book - Wednesday
  • Housing Starts – Thursday
  • Building Permits – Thursday
  • Philadelphia Fed Business Outlook Survey – Thursday
  • Jobless Claims – Thursday
  • Existing Home Sales – Friday

      Upcoming Federal Reserve Speakers

      • Williams – Tuesday
      • Bostic, Harker, Logan – Wednesday
      • Collins, Brainard, Williams – Thursday
      • Harker, Waller – Friday

        Rates snapshot

        Market implied policy path (overnight indexed swap rates)

        Source: Chatham Financial

        About the author

        • Bill Smith

          Associate Director
          Balance Sheet Risk Management

          Financial Institutions | Kennett Square, PA


        Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit

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