FOMC holds rates steady, inflation cools

Treasury yields increase in data-packed week

• Treasury yields increased across the curve for the second consecutive week, with the most significant moves coming at the front end of the curve.

Rising rate hedging activity continues amid pick-up in rates

• Despite the increase in yields recently, liability-sensitve clients have continued to execute strategies designed to protect against further increases in interest rates.

Headline inflation figures drop, retail sales and consumer sentiment improve

• In a busy week for economic data releases, market participants digested two high-profile inflation reports and updated retail sales figures.

Treasury yields increase in data-packed week

• Treasury yields increased across the curve for the second consecutive week, with the most significant moves coming at the front end of the curve.
  • The 2-year yield rose 11 basis points over the week to 4.70%, while the 10-year yield remained primarily unchanged, rising two basis points to 3.77%.
    
  • The outsized moves at the front end of the curve sent the 2s/10s basis nearly ten basis points further into inverted territory to -0.93%.
• In a widely expected move, the FOMC opted to leave the Target Range unchanged at 5.00% - 5.25%, snapping an 11-meeting streak of consecutive increases.
  • While the policy decision aligned with market expectations, the FOMC's updated Summary of Economic Projections garnered significant investor attention.
  • According to the updated projections, FOMC officials expect the policy rate to end the year 50 basis points higher than current levels, suggesting last week's meeting is more of a "skip" than a "pause" in the Fed's tightening campaign.
  • Despite the hawkish implications of the updated dot plot, Chair Powell delivered a more measured message during his post-meeting press conference, emphasizing that the July FOMC meeting is "live" but also highlighting that "We've moved much closer to our destination."

Rising rate hedging activity continues amid pick-up in rates

• Despite the increase in yields recently, rising rate hedging activity has continued in earnest.
  • Roughly 3/4ths of the hedging activity crossing our balance sheet strategies desk this year endeavored to protect against further increases in interest rates.
  • As noted previously, clients are utilizing two primary balance sheet categories, wholesale borrowings and fixed-rate assets, to obtain favorable hedging accounting treatment on these strategies.
  • Fixed-rate asset hedging accounts for over half of the executed rising rate hedges we've advised on as clients look to take advance of the flexibility afforded by the new Portfolio Layer Method.

Headline inflation figures drop, retail sales and consumer sentiment improve

• According to the Commerce Department, consumer prices rose 4.0% over the last year, down substantially from last month’s 4.9% reading.
  • After the monthly overall CPI reading fell to 0.1%, analysts suggested the report may give the Federal Reserve more room to pause interest rate hikes as we advance.
    
  • While falling energy prices and steady food prices have driven the headline figure's declines, the core inflation measure, which excludes the more volatile food and energy components, rose a more robust 0.4% over the month.
  • Notably, the Producer Price Index also experienced a drop, falling 0.3% in the last month.
• Investors received encouraging news on both the consumer spending and sentiment fronts.
  • According to the Census Bureau, May retail sales defied calls for a decline and instead rose 0.3% over the month, as increased vehicle sales drove the improvement.
  • The University of Michigan's Consumer Sentiment Index also rebounded in June as consumers' assessments of current conditions and the near-term outlook both improved notably last month.
  • Finally, inflation expectations cratered in June, with the 1-year inflation outlook falling from 4.2% to 3.3%.

The look forward

Upcoming economic data releases

• Housing Starts – Tuesday
• Building Permits – Tuesday
• MBA Mortgage Applications – Wednesday
• Chicago Fed National Activity Index – Thursday
• Jobless Claims – Thursday
• Existing Home Sales – Thursday
• Leading Index – Thursday
• S&P Global U.S. Manufacturing PMI – Friday

Upcoming Federal Reserve Speakers

• Bullard, Williams – Tuesday
• Powell, Goolsbee – Wednesday
• Powell, Waller, Bowman, Mester, Barkin – Thursday
• Bullard, Mester – Friday

Rates snapshot

Market implied policy path (overnight indexed swap rates)