May payrolls smash expectations, Congress passes debt ceiling bill

Treasury yields snap three-week streak of increases

• Treasury yields fell modestly last week after increasing meaningfully over the previous three weeks.

Hedging activity picks up amid increased volatility

• Treasury yields have experienced significant volatility this year in both directions, driving many clients to manage their interest rate risk positions more deliberately.

Congress passes debt ceiling bill, avoids U.S. default

• After President Biden and Speaker McCarthy negotiated a deal last weekend, Congress approved and passed the proposed bill before the end of the week, avoiding a disastrous U.S. default.

May payrolls smash expectations, manufacturing outlook dims

• Market participants reacted to a robust economic calendar last week including the May non-farm payroll report and the ISM Manufacturing survey.

Treasury yields snap three-week streak of increases

• Treasury yields fell modestly last week after increasing meaningfully over the previous three weeks.
  • The long end of the curve saw the most significant reversal as the 2-year yield dropped four basis points to 4.50%, and the 10-year yield fell a more substantial 11 basis points to 3.69%.
  • Although yields dropped across the curve last week, May marked a shift in investor sentiment for the Fed policy path and sent the policy-sensitive 2-year yield over 35 basis points higher during the month.
• A host of Federal Reserve officials held speaking engagements last week, revealing a divergence between officials on the very near-term policy path.
  • Philadelphia Fed President Patrick Harker and Fed Governor Jefferson advocated for a pause at the June meeting, while Cleveland Fed President Loretta Mester argued that there is no "compelling reason for a pause."
  • The divergence among officials has been a critical factor in the volatility experienced at the short end of the curve in recent weeks.
• According to Fed Funds futures pricing as of Friday’s close, market participants expect the FOMC to raise the policy rate by 25 basis points one more time in July before slashing rates by 25 - 50 basis points during the latter half of the year.

Hedging activity picks up amid increased volatility

• Treasury yields have experienced significant volatility this year in both directions, driving many clients to manage their interest rate risk positions more deliberately.
  • Liability-sensitive clients hedging for rising rates drove the majority of strategies executed year-to-date across our balance sheet strategies desk, with a healthy balance of fixed rate assets and floating-rate, or very short-term fixed-rate, borrowings utilized in the hedge accounting relationship.
• Although rates pulled back somewhat last week, the month-long trend higher at the front end of the curve has sparked renewed interest from our asset-sensitive clients looking to protect their falling rate exposure.
  • Falling rate products, like receive-fixed swaps and floors, have become more economical recently in the face of rising term rates and essentially unchanged overnight rates.

Congress passes debt ceiling bill, avoids U.S. default

• After President Biden and Speaker McCarthy negotiated a deal last weekend, Congress approved and passed the proposed bill before the end of the week, avoiding a disastrous U.S. default.
  • Under the new legislation, the debt ceiling is suspended through 2024, and federal spending caps have been agreed to for FY24 and FY25.
  • The new caps on spending suggest a slower pace in year-over-year government spending, but federal spending remains elevated at approximately $1.65T per year in the new legislation.
• Investors viewed the news positively as the feared "X-date" was quickly approaching, and the likelihood of a U.S. default increased before the breakthrough negotiations last weekend.

May payrolls smash expectations, manufacturing outlook dims

• Despite a robust economic calendar last week, the May non-farm payroll report garnered the most investor attention.
  • According to the Commerce Department, the U.S. economy added 339,000 jobs in May, surpassing the 195,000 consensus expectation and last month's 294,000 job additions.
  • Adding to the bullish report, the prior two months’ readings were revised higher by a net 94,000 jobs.
  • Wage pressures also experienced softening in May, albeit modestly, as wages picked up 0.3% in May, far slower than the 0.5% monthly increase reported in April.
  • Finally, the unemployment rate increased more than expected to 3.7%.
• The manufacturing industry outlook worsened last week after the national ISM Manufacturing Index fell to 46.9, marking the seventh consecutive month in contractionary territory.
  • Digging into the release, declines in new orders accounted for much of the drop but was buoyed somewhat by improvements in production.
  • In a bright spot, inflationary pressures appear to be subsiding as the prices paid component of the report unexpectedly fell to 44.2, the largest monthly drop since July and the lowest reading since December.

The look forward

Upcoming economic data releases

• S&P Global U.S. Services / Composite – Monday
• Factory Orders – Monday
• Durable Goods Orders – Monday
• ISM Services Index – Monday
• MBA Mortgage Applications – Wednesday
• Trade Balance – Wednesday
• Jobless Claims – Thursday
• Wholesale Inventories – Thursday

Upcoming Federal Reserve Speakers

• Mester - Monday

Rates snapshot

Market implied policy path (overnight indexed swap rates)