Economic data remains mixed, yields rise, and equities post strong gains
Summary
There were several economic data releases last week, and while they remain mixed, markets responded favorably. The S&P 500 posted a 5.33% return on the week with most of those gains following the ease of trade tensions between the U.S. and China. The 10-year yield finished the week 10 bps higher at 4.48%. Inflation came in cooler than expected on both the CPI and PPI reports which was especially important since the releases are now capturing periods after the tariff announcements. There was also news on the path for U.S. fiscal policy as the House unveiled their proposed tax bill. However, this will undoubtedly be revised as it makes its way through Congress. The 10-year yield is up 8 bps early this morning as a result of Moody’s downgrading the U.S. credit rating late Friday. Equities are also selling off; however, these initial reactions can quickly reverse course.
Inflation
Both CPI and Core CPI came in below expectations for the month at 0.2%. Year-over-year, CPI was 2.3% while Core CPI was 2.8%. Although both remain above the Fed’s 2% target, markets responded positively to the progress that was made, and inflation did not tick higher with the uncertainty surrounding tariffs. PPI and Core PPI were significantly below expectations for the month, yet prior month revisions kept the year-over-year numbers in line with estimates at 2.4% and 3.1%, respectively. Given the uncertainty around tariffs, and the quick shifts in policy, investors should expect to see volatility in these reports and large revisions. The impact of tariffs on inflation will become clearer over time; however, the reports so far seem to show that price increases have not made their way to consumers.
U.S. Treasuries
U.S. Treasuries indicate yields for on-the-run U.S. Treasury bills, notes, and bonds, which are typically the most recently auctioned and most liquid issue with a maturity closest to the stated tenor. These are commonly used for pricing fixed-rate debt at origination and for calculating yield maintenance.
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1-month Term SOFR swap rates
1-month Term SOFR swap rates reflect the rate to swap a Term SOFR indexed loan with monthly interest periods and payments and an Act/360 day count to a fixed rate. These rates do not include transaction specific mark ups and may not match swap rates for loans that use other SOFR base rate variations.
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Other key news and releases
The NFIB small business optimism index came in at 95.8, and although it was a month-over-month decline, it was better than expected. Retail sales dropped month-over-month; however, when considering the prior revisions, the report still shows a consumer that remains resilient. Jobless claims remain well behaved at 229,000, showing a cooler but still solid labor market. Perhaps the labor shortages from the pandemic have employers hesitant to reduce staff, but regardless of the reason a solid labor market is certainly playing a part in keeping the consumer and economy resilient. Housing starts were in line with expectations, while permits were slightly lower than expected. Interestingly, there was a decline in single family starts while multi-family starts saw a sharp increase in a continuation of a trend that began this year.
Some of the more negative reports released over the week were the Philly and Empire State manufacturing indexes, both posting negative numbers. Industrial production also came in below expectations: unchanged on the month with capacity utilization slipping to 77.7%. Consumer sentiment posted its second worst reading in history at 50.8. Year-ahead inflation expectations also jumped to 7.3%, up from 6.5%. Clearly, the market uncertainty has consumers worried; however, we have not seen it show up in much of the hard economic data nor have we seen consumers drastically change behaviors at this point.
The week ahead
This week will be a relatively light week for economic reporting. Leading economic indicators, flash services and manufacturing PMIs, and existing home sales are the only releases. However, the markets will be keenly focused on any news regarding U.S. trade and fiscal policy.
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