FOMC raises rates, Q2 GDP tops expectations

Rates rise as GDP impresses

• Building on the momentum from the week prior, Treasury yields across the curve advanced last week following a better-than-expected Q2 GDP release, with the most significant moves experienced at the long end.

Hedging activity accelerates in Q3

• Although we have seen asset-sensitive clients return to the fold commensurate with the run-up in rates recently, liability-sensitive clients hedging against further increases in interest rates remain the most active.

Bank M&A returns

• M&A activity picked up significantly last week after the two largest deals of the year were announced on the same day.

Q2 GDP tops expectations, consumer confidence improves

• In a busy week of economic data releases, market participants digested the first estimate of Q2 GDP, a consumer confidence report, the Fed’s preferred inflation measure, and a host of manufacturing and housing-related indicators.

Rates rise as GDP impresses

• Building on the momentum from the week prior, Treasury yields across the curve advanced last week following a better-than-expected Q2 GDP release, with the most significant moves experienced at the long end.
• The 2-year Treasury yield rose five basis points to 4.87%, while the 10-year increased a more robust 12 basis points to end the week at 3.96%.
• The more pronounced movement at the long end of the curve widened the 2s/10s basis seven basis points to -0.91%, off the mid-March lows but well below the yearly average of -0.63%.
• In a widely expected move, the FOMC raised the policy rate by 25 basis points on Wednesday.
• Fed Funds Target now sits at 5.50%, the highest level in 22 years.
• Despite intensive questioning from financial market journalists at Wednesday's post-meeting press conference, Fed Chair Jerome Powell offered little forward guidance and suggested that the Fed will remain data dependent as it decides on future policy rate changes.
• Notably, Chair Powell commented that Fed staffers “are no longer forecasting a recession” given the “resilience” of the economy reflected in recent data releases.
• As of Friday’s close, market participants are placing just a 20% probability on the FOMC raising rates at the next meeting in September and are currently projecting last week's hike to cap an end to a historic Fed tightening cycle.
• Interestingly, the markets' view diverges from the median Fed forecast that suggests the FOMC will raise the policy rate by 25 basis points one more time in 2023.

Hedging activity accelerates in Q3

• Although we have seen asset-sensitive clients return to the fold commensurate with the run-up in rates recently, liability-sensitive clients hedging against further increases in interest rates remain the most active.
• Last week, several clients leveraged fixed-rate loans or AFS securities portfolios in a Portfolio Layer Method relationship to achieve favorable hedge accounting treatment on their executed hedges.
• While wholesale borrowing strategies are more prevalent in a historical context, we have seen most of our clients use fixed-rate assets over wholesale borrowings in the hedge accounting relationship recently, capitalizing on the flexibility offered via the Portfolio Layer Method framework.
• With some borrowers anticipating SOFR is now potentially at its apex of this cycle, borrowers with outstanding floating-rate debt are able to recognize substantial immediate interest savings by entering into an interest rate swap.
• Borrowers looking to hedge the next three, five, and 10 years are able to save over 50, 90, and 110 bps, respectively, as compared to current floating rates, despite the rise in swap rates over the past couple of months.

Bank M&A returns

• A rapidly rising interest rate environment coupled with regional banking industry stress in Q1 slowed Bank M&A activity significantly in 2023, with only 50 deals announced year-to-date.
• However, M&A activity picked up significantly last week after the two largest deals of the year were announced on the same day.
• Two west coast institutions, Banc of California Inc. and PacWest Bancorp, announced a merger valued at $1.02 billion, marking the largest deal announcement of the year.
• Earlier that day, Atlantic Union Bankshares Corp. announced its planned acquisition of American National Bankshares Inc. in a deal valued at $443.7 million.
• Although this year’s M&A activity remains below the pace seen in 2021 and 2022, last week’s announcements mark two of the five largest deals announced since 2022.

Q2 GDP tops expectations, consumer confidence improves

• In a busy week of economic data releases, market participants digested the first estimate of Q2 GDP, a consumer confidence report, the Fed’s preferred inflation measure, and a host of manufacturing and housing-related indicators.
• According to the Commerce Department, real GDP accelerated at a 2.4% annualized pace in the second quarter, far higher than the 1.8% consensus estimate and the 2.0% annualized pace observed in the first quarter.
• The report sent rates higher as investors grew more confident of the U.S. economy’s resilience to higher rates and ability to avoid a hard landing.
• Separately, the Fed’s preferred measure of inflation, Core PCE, rose 4.1% from a year earlier, notching the smallest rise since September 2021.
• Consumer confidence improved in July, according to the latest Conference Board Consumer Confidence report.
• Notably, measures of the current situation and expectations for the future improved compared to June as consumers viewed the job market positively and saw signs of easing inflation.
• Interestingly, the latest Conference Board report conflicts with the recent University of Michigan survey release that suggested consumer confidence deteriorated modestly in July.

The look forward

Upcoming economic data releases

• MNI Chicago PMI – Monday
• Dallas Fed Manufacturing Activity Index – Monday
• S&P Global U.S. Manufacturing PMI – Tuesday
• ISM Manufacturing Index – Tuesday
• MBA Mortgage Applications – Wednesday
• ADP Employment Report – Wednesday
• Jobless Claims – Thursday
• Factory Orders – Thursday
• Durable Goods Orders – Thursday
• July Non-Farm Payroll Report – Friday

Upcoming Federal Reserve Speakers

• Goolsbee – Monday
• Goolsbee – Tuesday
• Barkin – Wednesday

Rates snapshot

Market implied policy path (overnight indexed swap rates)