Skip to main content
Market Update

March CPI sets four-decade high; Fed officials signal 50bps hike

Date:
April 18, 2022
  • william smith headshot

    Authors

    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA

Summary

In a holiday-shortened week, the Treasury curve continued to steepen as market participants digested March inflation readings, hawkish comments from Federal Reserve officials, and the latest developments out of Ukraine.

Interest rates

  • After flattening for much of the first quarter, the Treasury curve steepened last week with the front-end of the curve remaining roughly unchanged while the long-end of the curve pushed 10-15 bps higher.
    • To put the recent change in curve shape into perspective, the 2s/10s basis marked a roughly 15-year low of negative eight basis points just over two weeks ago but has since widened significantly to end Friday at approximately 37 basis points.
  • The upward moves in the long end of the curve have been mostly a function of increased bets for growth as market participants wager that the U.S. economy can withstand the expected aggressive Fed hiking cycle.
  • A host of Federal Reserve officials held speaking engagements during the week, with most suggesting a 50 basis point hike in May is likely.
    • Several officials indicated a preference for a “front-loaded” approach to rate hikes, with Richmond Fed President Thomas Barkin arguing that “The best short-term path for us is to move rapidly to the neutral range” at an event on Tuesday.
  • Looking at Friday’s pricing, investors have heard the Fed’s messaging loud and clear with the Fed Funds futures market pricing in a 98% chance of a 50 basis point hike at the next FOMC meeting in early May.
    • As we look toward the summer, current pricing suggests that the Fed will raise the target range 125 basis points from current levels by mid-summer.
  • Finally, real yields are moving rapidly toward positive territory with the 20 and 30-year Treasury real yields already positive and the 10-year real yield just six basis points away from crossing zero, its highest level since late March 2020.

              Trading commentary

              • Although the week was shortened due to the holiday, our balance sheet desk continued to see significant hedging activity last week.
                • As we have indicated previously, hedges aimed at locking in the cost on expected future wholesale funding have picked up significantly since the start of the year as some of our financial institutions’ clients begin to experience deposit run-off and expect the need for wholesale funding in the next six-18 months.
              • On the other hand, we continue to see many of our asset-sensitive clients pull income forward, monetizing the relative steepness at the front-end of the curve to smooth earnings in the expected rising rate environment.
              • As we start the second quarter, our back-to-back trading desk remains active with many borrowers looking to lock in long-term fixed-rate financing in the face of the expectation for the most aggressive Fed tightening cycle in years.

                          Big banks report first-quarter earnings

                          • Several of the largest U.S. financial institutions reported first-quarter earnings last week and expressed optimism for the coming year as loan growth picks up and interest rates rise.
                            • Wells Fargo increased their expectations for full-year net interest income growth as the bank expects a quicker pace of Fed tightening than in December with CFO Michael Santomassimo prophesying, “Net interest income is going to be a lot better” during last week’s earnings call.
                          • JPMorgan also reported a pickup in loan growth with CFO Jeremy Barnum commenting that the “industrywide loan growth outlook is quite robust” and that December’s projections for full-year loan growth remain roughly intact.
                          • Interestingly, JPMorgan indicated a pull-back in long-duration securities purchases, arguing that “Given the timing and expected speed of the rate hikes, increasingly, it just kind of doesn’t matter that much.”
                          • Market participants are gearing up for a busy period as many U.S. financial institutions are slated to report first-quarter earnings in the coming weeks.

                                    Economic data

                                    • While the economic calendar had several high-profile releases on the docket last week, the inflation-related data trumped all others as investors gained insight into the evolving inflationary environment.
                                      • Tuesday marked the release of the March Consumer Price Index (CPI) which indicated that consumer prices rose 1.2% in the last month, above the 0.8% pace seen in February but in line with the consensus expectation.
                                    • Rates moved lower on the news after running up considerably the day prior as market participants braced for an expectation-beating print.
                                    • Looking at the core measure, which excludes the often-volatile food and energy components, inflation eased somewhat in March with core prices rising 0.3% in March, below both the consensus expectation and February’s 0.5% increase.
                                    • Investor sentiment dipped the next day, however, when Wednesday’s release of the Producer Price Index (PPI) showed core producer prices rising 1.0% in March, double the consensus expectation.
                                      • Looking at the yearly figures, the CPI is up 8.5%, a four-decade high, and the PPI is up 11.2% in the last year.
                                    • In a bright spot, the University of Michigan’s consumer sentiment reading improved significantly in April after seeing three straight months of declines on the back of inflation and war-related concerns.

                                                              The look forward

                                                              Upcoming economic data releases

                                                              • Housing Starts – Tuesday
                                                              • Existing Home Sales – Wednesday
                                                              • Beige Book – Wednesday
                                                              • Philadelphia Fed Business Outlook Survey – Thursday
                                                              • Jobless Claims – Thursday
                                                              • Leading Index – Thursday
                                                              • S&P Global U.S. Manufacturing PMI – Friday

                                                                                            Upcoming Federal Reserve Speakers

                                                                                            • Bullard – Monday
                                                                                            • Evans – Tuesday
                                                                                            • Daly, Evans, Bostic – Wednesday
                                                                                            • Powell – Thursday

                                                                                                                            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


                                                                                                                            Disclaimers

                                                                                                                            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 chathamfinancial.com/legal-notices.

                                                                                                                            Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.

                                                                                                                            22-0095