Short-end rises following Powell’s Jackson Hole speech

Rates rise after Powell’s Jackson Hole speech

• After steepening notably throughout August, the Treasury curve flattened last week after Jerome Powell's hawkish commentary drove short-term rates higher.

Asset-sensitive hedging activity picks up amid increase in rates

• Last week, asset-sensitive strategies picked up notably as short-term rates rose, and the relative economics of these strategies improved.

Manufacturing data mixed, consumer sentiment worsens

• In a week devoid of major data releases, investors received updates on the manufacturing industry, the housing market, and consumer sentiment.

Rates rise after Powell’s Jackson Hole speech

• After steepening notably throughout August, the Treasury curve flattened last week after Jerome Powell's hawkish commentary drove short-term rates higher.
• The policy-sensitive two-year yield climbed 11 basis points, crossing the psychologically significant 5.00% level, and ended the week at 5.03%, while the 10-year dropped one basis point to 4.25%.
• Despite last week's flattening, the curve remains substantially steeper than the multi-decade low set in mid-March.
• All eyes turned to Fed Chair Powell when he delivered a highly anticipated speech at the annual Jackson Hole Economic Policy Symposium.
• Powell lent credence to the "higher for longer" narrative, stating that the FOMC will hold rates at a "restrictive level" until there is evidence inflation is moving "sustainably" toward their 2% objective.
• Commenting on the inflation outlook, Powell noted that prices "still have a long way to go" but expressed optimism about recent reports.
• Notably, despite the hawkish tone, Powell opened the door to a pause at the September meeting, arguing that the inflation progress made thus far, coupled with a restrictive policy level places the FOMC "in a position to proceed carefully" at future meetings.
• Looking at Fed Funds futures pricing on Friday, market participants expect the Fed to pause at the September meeting and hike once more at the November meeting before beginning an easing campaign in 2024.

Asset-sensitive hedging activity picks up amid increase in rates

• After dominating the hedging activity in 2022, asset-sensitive hedging strategies took a back seat to programs that protect against a rising interest rate environment in 2023.
• Last week, however, asset-sensitive strategies picked up notably as short-term rates rose, and the relative economics of these strategies improved.
• Most of the hedging activity remains at the short-end of the curve, and we saw a healthy balance of clients utilizing receive-fixed swaps and various option-based products to hedge their risk to falling rates.
• Interestingly, looking at just option products, a wide range of products were leveraged, with clients hedging using interest rate floors, costless collars, and floor spreads.
• Nonetheless, clients hedging against a rising interest rate environment continue to represent the lion's share of trade executions crossing our balance sheet strategies desk.
• As noted previously, clients have utilized the Portfolio Layer Method (PLM) strategy more frequently than wholesale borrowings this year, given the flexibility afforded by the change in hedge accounting guidance.
• Looking at activity levels, PLM strategies represent the most implemented strategy year-to-date.

Manufacturing data mixed, consumer sentiment worsens

• In a week devoid of major data releases, investors received updates on the manufacturing industry, the housing market, and consumer sentiment.
• After receiving several positive manufacturing releases the week prior, investors grappled with a cohort of mixed manufacturing releases last week.
• The regional Richmond and Kansas City Fed Manufacturing indices notched readings above the consensus estimate after measures of new orders and local business conditions improved compared to one month ago.
• On the other hand, the national S&P Global U.S. Manufacturing PMI remained in contractionary territory for the fourth consecutive month and dropped below last month’s level and the consensus estimate on depressed new orders levels.
• After logging a robust improvement in July, the University of Michigan consumer sentiment report dipped below expectations and the prior month’s level in August but sits comfortably above levels reported at the start of the summer.
• In a uniformly weaker report compared to July, measures of current and expected future conditions declined, while measures of both near-term and long-term inflation increased over the month and topped 3.0%.

The look forward

Upcoming economic data releases

• Dallas Fed Manufacturing Index – Monday
• Conference Board Consumer Confidence – Tuesday
• MBA Mortgage Applications – Wednesday
• ADP Employment Change – Wednesday
• Wholesale Inventories – Wednesday
• Q2 GDP (2^nd estimate) – Wednesday
• Jobless Claims – Thursday
• Personal Income / Spending – Thursday
• MNI Chicago PMI – Thursday
• August non-farm payroll report – Friday
• S&P Global U.S. Manufacturing PMI – Friday
• Construction Spending – Friday
• ISM Manufacturing Index – Friday

Upcoming Federal Reserve Speakers

• Barr – Monday
• Barr – Tuesday
• Bostic, Collins – Thursday
• Bostic, Mester – Friday

Rates snapshot

Market implied policy path (overnight indexed swap rates)