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Market Update

Hot PPI report sends rates higher

December 12, 2022
  • william smith headshot


    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA


After experiencing two consecutive weeks of declines, Treasury yields rebounded last week as investors digested another hot inflation report and prepared for the upcoming FOMC meeting.

Interest rates

  • Treasury yields advanced across the curve reversing their recent downward trend and moving 5–10 basis points higher depending on the tenor.
    • The 2-year and 10-year Treasury yields each increased approximately six basis points during the week to 4.33% and 3.57%, respectively.
    • The 2s/10s basis, a popular measure of the Treasury curve’s shape, remained roughly unchanged at -0.76%.
    • Although the curve received a respite last week from the flattening trend seen for most of this quarter, the Treasury curve’s inversion is substantial in a historical context with the 2s/10s basis hovering near its lowest level since 1981.
  • Although Fed commentary was quiet last week as Fed officials sat in the blackout period before this week’s FOMC meeting, investors adjusted their expectations for policy rate movement in 2023 nonetheless.
    • Looking at Fed Funds futures market pricing on Friday, market participants see a 50 basis point hike next Wednesday as a virtual certainty, a notable change in the pace of increases if proved true.
    • Looking into 2023, expectations are similar to the week prior, save for market participants pricing in a moderately higher peak for the policy rate and a modestly slower start to the rate-cutting campaign.
    • All attention will now turn to Tuesday’s November Consumer Price Index (CPI) release and the Fed’s decision and commentary on Wednesday.
  • Finally, real yields moved markedly higher across the curve as the modest pick up in nominal rates combined with a significant decline in inflation expectations on the back of cooling inflationary pressures sent the 5-year and 10-year real yields to their highest levels this month.

Trading commentary

  • Hedging activity remains robust on our balance sheet strategies desk, with several clients capitalizing on the recent decline in interest rates.
  • Although hedging activity remains skewed toward strategies designed to profit from a decline in interest rates, we have seen a notable increase in the number of rising rate hedges this month.
    • Specifically, clients are most often extending the duration of their wholesale funding portfolio while optimizing the cost of the borrowings with plain-vanilla pay-fixed interest rate swaps.
    • SOFR-based floating advances from the FHLB are the most prevalent underlying balance sheet item used for these strategies, as the indexed borrowing allows for straightforward derivative structuring and clean hedge accounting application.
    • Alternatively, we have aided clients in accomplishing a similar economic objective by using the asset side of the balance sheet and leveraging the fixed-rate asset portfolio coupled with the Portfolio Layer Method fair value hedge accounting improvements.

Big Banks report stabilizing deposits after Q3 drop

  • Deposits in aggregate have declined in the banking space in the last two quarters, and wholesale borrowing use has risen notably, a fact pattern supported by the hedging activity we have seen this year.
  • Despite the recent drop in deposit balances, Bank of America Corp. CEO Brian Moynihan emphasized his expectation for deposit base stabilization in the next quarter at a recent conference arguing that “If they were going to move the money, they would have moved it by now.”
    • Moynihan’s comments come after the bank reported a 2.3% sequential drop in deposits last quarter.
    • Moynihan painted a dark picture for the U.S. economy, however, as he highlighted the decrease in household savings balances and loan demand and suggested, “This is sort of consistent with a very low growth economy, what we're seeing now.”

Economic data

  • In a light week for economic data releases, market participants turned most of their attention to Thursday’s release of the Producer Price Index (PPI).
  • According to Thursday’s PPI release, wholesale prices increased 0.3% since October and 7.4% from a year earlier, elevated in a historical context and greater than the consensus estimates but a notable slowdown from the yearly pace reported last month.
    • Although the monthly reading was hotter than expected, investors found solace in the annual increase, the lowest figure reported since April 2021.
    • Signs of cooling inflation have prompted market participants to lower their expectations from a 75 basis point hike to a 50 basis point hike for this week’s FOMC meeting in recent weeks, but investors will have one final look at inflation figures before the FOMC meeting as the CPI report is scheduled for release one day before the FOMC rate decision.
  • Lastly, consumer sentiment has improved somewhat in recent weeks.
    • According to the preliminary December University of Michigan consumer sentiment report, consumers are more optimistic about the current and future outlook for the U.S. economy than at the end of November.

The look forward

  • Upcoming economic data releases
    • Consumer Price Index – Tuesday
    • Empire Manufacturing Index – Thursday
    • Retail Sales – Thursday
    • Jobless Claims – Thursday
    • Industrial Production – Thursday
    • Philadelphia Fed Business Outlook Survey – Thursday
    • S&P Global US Manufacturing / Services PMIs - Friday
  • Upcoming Federal Reserve Speakers
    • Fed Chair Powell Press Conference – Wednesday
    • Daly - Friday

Rates snapshot

Rates Snapshot 12 12 22

Market implied policy path (overnight indexed swap rates)

Market implied policy path 12-12-22

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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