March NFP meets expectations, Yields fall

Treasury yields decline on the week despite healthy NFP and hawkish Fed speak

• After rising considerably last week, Treasury yields fell moderately across a slightly flatter curve.

Hedging activity continues amid drop in yields

• After several weeks of elevated activity in the face of significant market volatility, hedging activity moderated to a more normalized pace last week before trailing off on Friday due to the holiday.

Community banks’ deposit costs rise in Q4, weekly deposit data reports inflows

• On the back of a historically hawkish Federal Reserve, the cost of deposits at U.S. community banks with less than $10 billion in assets rose in all regions in the fourth quarter, according to an analysis conducted by S&P Capital IQ.

March NFP meets expectations, manufacturing data continues to disappoint

• Despite last week’s active economic calendar, investors mainly focused on Friday’s March non-farm payroll report and Monday’s ISM Manufacturing release.

Treasury yields decline on the week despite healthy NFP and hawkish Fed speak

• After rising considerably the week prior, Treasury yields fell moderately across a slightly flatter curve.
  • The 2-year and 10-year Treasury yields fell approximately nine basis points during the week to 3.97% and 3.39%, respectively.
  • Comparable moves at each end of the curve left the 2s/10s basis virtually unchanged at -0.58%, a significant departure from the -1.09% multi-decade low observed a month earlier.
  • Although yields fell week-over-week, rates advanced considerably on Friday after an expectation-matching non-farm payroll (NFP) report and inflation data lent credence to the “higher-for-longer” narrative.
• Expectations for Fed policy over the next two years shifted after recent data releases and Fed commentary.
  • As of Friday’s close, Fed Funds futures pricing suggested a 2/3rd chance of a 25 basis point hike at the next FOMC meeting in May, up from around 50/50 odds seen a week ago.
• Several federal Reserve officials suggested that inflation-fighting efforts are ongoing and that tightening would remain appropriate in the near term.
  • Fed officials Bullard and Mester expressed their preference for higher rates; however, Cleveland Fed President Mester suggested that rates only need to rise “a little bit higher,” while St. Louis Fed President Bullard stated his desire for a Target Range og 5.50-5.75%, a level far above the latest median estimate from Fed officials.
  • Current market pricing anticipates a policy rate of approximately 4.15% in January 2024, roughly 70 basis points below the current level.

Hedging activity continues amid drop in yields

• After several weeks of elevated activity in the face of significant market volatility, hedging activity moderated to a more normalized pace last week before trailing off on Friday due to the holiday.
• Hedging activity continues to favor rising rate transactions as clients look to protect against further increases in interest rates and lock in borrowing costs near the lowest levels available in 2023 to date.
  • Despite the reported need for wholesale borrowings reported across our client base, many of our clients have opted to leverage the new Portfolio Layer Method when implementing these strategies to take advantage of the newfound flexibility offered in the updated guidance.
  • Nonetheless, liability hedging remains popular with those clients often hedging short-term wholesale borrowings from the FHLB.

Community banks’ deposit costs rise in Q4, weekly deposit data reports inflows

• On the back of a historically hawkish Federal Reserve, the cost of deposits at U.S. community banks with less than $10 billion in assets rose in all regions in the fourth quarter, according to an analysis conducted by S&P Capital IQ.
  • The median cost of deposits rose to 54 basis points in the fourth quarter, up meaningfully from the 0.25% level in the fourth quarter of 2021.
  • The Northeast region saw the most significant gains as the median cost in the Northeast rose to 60 basis points.
  • Analysts widely expect deposit costs to trend higher as banks see increased competition for deposits from peers, and historically elevated interest rates prompt depositors to move funds into higher-yielding deposit products.
• After seeing significant deposit outflows in the wake of several bank closures last month, deposit balances are off the lows for U.S. financial institutions according to the latest weekly, non-seasonally-adjusted data from the Federal Reserve.
  • Deposits rose approximately 50 billion in the last week ended March 29, 2023, to $10.75 trillion.

March NFP meets expectations, manufacturing data continues to disappoint

• Despite last week’s active economic calendar, investors mainly focused on Friday’s March non-farm payroll report.
  • According to the labor department, the U.S. economy added 236,000 jobs in March, just above the consensus estimate and moderately below the 326,000 additions in February.
  • The report’s inflation metrics also aligned with expectations, reinforcing the sentiment that the Fed will have room to continue to hike in the face of slowing but elevated inflation and a healthy job market.
  • Notably, the unemployment rate fell to 3.5%, despite the pick-up in the labor force participation rate.
• The National ISM Manufacturing Index reinforced the commentary offered in recent regional surveys after the Index fell to its lowest level since March 2020 on depressed new order and employment levels.
  • When excluding the pandemic, the March ISM reading marked the lowest level since 2009.
  • On a positive note, the ISM prices paid measure fell far below the consensus estimate, suggesting that inflationary pressures may be relaxing in the face of waning demand.

The look forward

Upcoming economic data releases

• Wholesale Inventories – Monday
• Consumer Price Index – Wednesday
• MBA Mortgage Applications – Wednesday
• FOMC Meeting Minutes – Wednesday
• Jobless Claims – Thursday
• Producer Price Index – Thursday
• Retail Sales – Friday
• Industrial Production – Friday
• University of Michigan Consumer Sentiment – Friday

Upcoming Federal Reserve Speakers

• Williams – Monday
• Goolsbee, Harker, Kashkari – Tuesday
• Barkin, Daly – Wednesday
• Waller – Friday

Rates snapshot

Market implied policy path (overnight indexed swap rates)