Prior Week Summary
The Treasury market closed the week nearly were it began as a mixed bag of incoming information left the curve relatively unchanged on the week. At the same time, the S&P 500 rallied 2.8% during the holiday shortened trading week, continuing the rebound from the multi-year lows reached only a few days ago. On a positive note, consumer price inflation rose to the highest level in over three years on a year-over-year basis, rising 2.2% excluding food and energy. The core measure rose 0.3% in January, counter to expectations for a decline, as increases in medical care prices, housing costs, and the auto sector pulled the index higher. The strength of the print surprised the market and will likely be used to support the notion that improving economic fundamentals, combined with the transitory effects of declines in energy and import prices, will be sufficient for the Fed to justify additional rate hikes this year.
The FOMC meeting minutes from the January 27th meeting were released on Wednesday and highlighted increasing concern about tightening financial conditions domestically and the associated downside risks to economic growth. Indeed, the Fed noted that “Domestic financial conditions tightened over the intermeeting period, as turmoil in Chinese financial markets and lower oil prices contributed to concerns about prospects for global economic growth and a pullback from risky assets. The increased reluctance to hold risky assets was associated with a sharp decline in equity prices and a notable widening in risk spreads on corporate bonds.”
The Fed also reiterated their view that inflation will increase to their 2% target over the medium term, “as the transitory effects of declines in energy and import prices dissipated and the labor market strengthened further.” Given their increased uncertainty about how global economic and financial developments might evolve, the FOMC emphasized the importance of closely monitoring these developments and of assessing their implications for the labor market and inflation, and for the balance of risks to their outlook.
The Look Forward
Looking forward to the week ahead, the markets are likely to focus on the state of the manufacturing sector, the latest figures on consumer confidence, and existing home sales. There is a full docket of Fed speakers this week, starting with Vice Chair Stanley Fischer speaking in Houston on developments in monetary policy. The Treasury is expected to come to the market and auction $26B in 2-yr notes, $13B in a reopening of the 2-yr FRNs, $34B in 5-yr notes, and $28B of 7-yr notes.