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Market Update

Weak retail sales report sours sentiment and sends yields lower

January 23, 2023
  • william smith headshot


    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA


In a holiday-shortened week, Treasury yields notched their third-consecutive week of declines as investors digested weaker-than-expected economic data coupled with the Bank of Japan’s continued commitment to yield curve control.

Interest rates

  • Treasury yields continued to decline last week across a modestly steeper curve.
    • The 2s/10s basis widened four basis points to -0.69% but remains significantly inverted and only 15 basis points away from the four-decade lows seen in early December.
    • Despite the run-up in rates experienced in the final two weeks of 2022, interest rates have fallen each week in 2023, with the 2-year and 10-year Treasury yields falling 27 bps and 40 bps, respectively, year-to-date.
  • Market expectations for FOMC policy rate cuts in late 2023 and beyond continued to grow last week, with market participants currently pricing in a series of 25 basis point cuts at the November, December, and January FOMC meetings.
    • However, the near-term outlook remained roughly unchanged, as investors continue to expect a 25bp hike at the next FOMC meeting and a second 25bp hike by May.
  • Although last week’s Producer Price Index (PPI) release followed in the footsteps of the week prior’s Consumer Price Index (CPI) report and pointed to month-over-month deflation, inflation expectations picked up modestly.
    • Real yields at the 5-year and 10-year points fell more than their nominal counterparts, declining seven and four basis points over the week.

Trading commentary

  • Hedging activity and strategy conversations have accelerated in the last two weeks as many clients reported a need for wholesale funding and a desire to lock in the cost of a portion of the borrowings.
    • Although strategies designed to protect against falling rates dominated hedging activity in 2022, early signs in 2023 point to the return of a more balanced level of activity as more clients are now endeavoring to protect against further drops in margin from rising borrowing costs.
    • Specifically, clients have been most frequently pairing pay-fixed swaps in the two to five-year range with SOFR-based floating advances from the FHLB to extend the duration of the borrowings and mitigate liability sensitivity.
    • While wholesale funding hedges have been the most popular rising rate hedge in 2023, we continue to see clients leverage the new Portfolio Layer Method to shorten the duration of the fixed-rate loan and AFS securities books

Economic data

  • Although Monday’s Martin Luther King Jr. Day holiday shortened the work week, investors received plenty of high-profile economic data last week, including two regional manufacturing surveys, a highly anticipated PPI report, and December’s retail sales figure.
  • The manufacturing industry outlook continued to worsen after the Empire Manufacturing Index defied calls for a monthly improvement and instead fell nearly four times greater than the consensus estimate on Tuesday to its lowest level since May 2020.
    • Digging into the release, new orders and shipments fell dramatically, along with declines in employment and employee hours-worked.
    • In a bright spot, the forward-looking measures improved moderately month-over-month.
  • According to the U.S. Census Bureau, retail sales plummeted in December by 1.1%, greater than the consensus estimate and adding to the pain of November’s downward revision.
    • Although falling energy sales contributed to the monthly decline, investors grew concerned with the broad-based declines suggested in the report, including cuts to furniture, electronics, and motor vehicle purchases.
    • Nonetheless, the December reading capped an end to 2022 figures which saw retail sales advance 9.2% yearly, the second biggest gain in series history dating back to 1993, but uniquely against a backdrop of soaring inflation.
  • Finally, wholesale prices fell 0.5% in December, according to last week’s PPI release.
    • The report further solidified the week’s prior’s CPI figure, which also reported falling prices month-over-month and contributed to an apparent shift in prevailing market sentiment regarding inflation

The look forward

Upcoming economic data releases

  • Leading Index – Monday
  • S&P Global Manufacturing and Services PMIs – Tuesday
  • Richmond Fed Manufacturing Index – Tuesday
  • MBA Mortgage Applications – Wednesday
  • Chicago Fed National Activity Index – Thursday
  • Fourth Quarter GDP (1st estimate) – Thursday
  • Wholesale Inventories – Thursday
  • Durable Goods Orders – Thursday
  • New Home Sales – Thursday
  • Jobless Claims – Thursday
  • Personal Income / Spending – Friday
  • University of Michigan Consumer Sentiment – Friday

Upcoming Federal Reserve Speakers

  • There are no speaking Federal Reserve engagements scheduled for this week due to the blackout period prior to the January 31 – February 1 FOMC monetary policy meeting.

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


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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